Source: https://supreme.justia.com/cases/federal/us/228/295/
Timestamp: 2019-04-25 15:51:31+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 228 › McCoach v. Minehill & Schuylkill Haven R. Co.
The corporation tax is imposed upon the doing of corporate business and with respect to the carrying on thereof, and not upon the franchises or property of the corporation irrespective of their use in business. Flint v. Stone Tracy Co., 220 U. S. 107, 220 U. S. 145.
A railway corporation which has leased its railroad to another company operating it exclusively, but which maintains its corporate existence and collects and distributes to its stockholders the rental from the lessee and also dividends from investments, is not doing business within the meaning of the Corporation Tax Act. Park Realty Company case sub Flint v. Stone Tracy Co., 220 U. S. 171, distinguished, and Zonne v. Minneapolis Syndicate, 220 U. S. 187, followed.
Quaere whether such a corporation would be subject to the tax if it exercised the power of eminent domain or other corporate powers for the benefit of the lessee.
The facts, which involve the construction of the provisions of the Corporation Tax Act as to what constitutes doing business by a corporation so as to subject it to the tax, are stated in the opinion.
The Minehill & Schuylkill Haven Railroad Company, the respondent herein (called for convenience the Minehill Company), sued the petitioner, who is Collector of Internal Revenue at Philadelphia, to recover certain taxes for the years 1909 and 1910, paid under protest by that company under the Corporation Tax Act of 1909. The United States circuit court held that the company was not "engaged in business" within the meaning of the act, and that therefore the taxes had been illegally assessed, and rendered judgment for their recovery. 192 F. 670. The circuit court of appeals affirmed the judgment, and the case comes here upon certiorari.
hereafter during the time hereby demised be lawfully exercised or enjoyed in or about the use, management, maintenance, renewal, extension, alteration, or improvement of the demised premises, or any of them,"
unto the Philadelphia & Reading Railway Company for a term of nine hundred and ninety-nine years from January 1, 1897 at a yearly rental of $252,612, that being equivalent to six percentum upon the capital stock of the Minehill Company.
"put in force and exercise each and every corporate power, and do each and every corporate act, which the Minehill Company might now, or at any time hereafter, lawfully put in force or exercise, to enable the railway company (the lessee) to enjoy, avail itself of, and exercise, every right, franchise, and privilege in respect of the use, management, maintenance, renewal, extension, etc., of the property demised, and of the business to be there carried on."
the nonuser of such portions of the railroad lines."
In the event thus provided for, the abandoned rails, machinery, etc., are to be sold, and the proceeds turned over to the Minehill Company, and the annual rental proportionately reduced.
Pursuant to this lease, the entire railroad and all property connected therewith was turned over to the Reading Company, and since then has been operated by that company, and the Minehill Company has not carried on any business in connection with the operation of it. It has, however, maintained its corporate existence and organization by the annual election of a president and board of managers, and this board has annually elected a secretary and treasurer. It receives annually from the Reading Company the fixed rental called for by the lease, and it receives annually sums of money as interest on its bank deposits, and also maintains a "contingent fund," from which it receives annual sums as interest or dividends. And it annually pays the ordinary and necessary expenses of maintaining its office and keeping up the activities of its corporate existence, including the payment of salaries to its officers and clerks. It keeps and maintains at its offices stock books for the transfer of its capital stock, and this stock is bought and sold upon the market. The annual income from the contingent fund appears to be about $24,000, its annual payments for state taxes about as much, and its expenditures for corporate maintenance about $5,000.
entire net income over and above $5,000 received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock of other corporations . . . subject to the tax hereby imposed. . . ."
"Such net income shall be ascertained by deducting from the gross amount of the income of such corporation, . . . received within the year from all sources: (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges such as rentals or franchise payments, required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property. . . ."
to such as is received from property used in the business, strictly speaking, but is expressly declared to be upon the entire net income above $5,000, from all sources, excluding the amounts received as dividends on stock in other corporations, joint stock companies or associations, or insurance companies also subject to the tax. In other words, the tax is imposed upon the doing of business of the character described, and the measure of the tax is to be the income, with the deduction stated, received not only from property used in business, but from every source."
"does not impose direct taxation upon property solely because of its ownership, but the tax is within the class which Congress is authorized to lay and collect under Art. I, § 8, cl. 1 of the Constitution, and described generally as taxes, duties, imposts, and excises, upon which the limitation is that they shall be uniform throughout the United States. "
"work, develop, sell, convey, mortgage, or otherwise dispose of real estate; to lease, exchange, hire, or otherwise acquire property; to erect, alter, or improve buildings; to conduct, operate, manage, or lease hotels, apartment houses, etc.; to make and carry out contracts in the manner specified concerning buildings . . . and generally to deal in, sell, lease, exchange, or otherwise deal with lands, buildings, and other property, real or personal,"
"We think it clear that corporations organized for the purpose of doing business, and actually engaged in such activities as leasing property, collecting rents, managing office buildings, making investments of profits, or leasing ore lands and collecting royalties, managing wharves, dividing profits, and in some cases investing the surplus, are engaged in business within the meaning of this statute, and in the capacity necessary to make such organizations subject to the law."
"for the convenience of its stockholders to receive, and to distribute among them, from time to time, the rentals that accrue, under said lease, and the proceeds of any disposition of said land."
"The corporation involved in the present case, as originally organized, and owning and renting an office building, was doing business within the meaning of the statute as we have construed it. Upon the record now presented, we are of opinion that the Minneapolis Syndicate, after the demise of the property and reorganization of the corporation, was not engaged in doing business within the meaning of the act. It had wholly parted with control and management of the property; its sole authority was to hold the title subject to the lease for 130 years, to receive and distribute the rentals which might accrue under the terms of the lease, or the proceeds of any sale of the land, if it should be sold. The corporation had practically gone out of business in connection with the property, and had disqualified itself by the terms of reorganization from any activity in respect to it."
The precise question presented by the present record is whether the Minehill Company is "doing business" in the sense in which the realty companies concerned in Flint v. Stone Tracy Co., 220 U. S. 107, 220 U. S. 170, were doing business, or had gone out of business in substantially the same sense that the Minneapolis Syndicate had done so.
incorporation. This business, by the lease of 1896, it had turned over to the Reading Company. If that lease had been made without authorization of law, it may be that, for some purposes, and possibly for the present purpose, the lessee might be deemed in law the agent of the lessor, or at least, the lessor held estopped to deny such agency. But the lease was made by the express authority of the state that created the Minehill Company, conferred upon it its franchise, and imposed upon it the correlative public duties. The effect of this legislation and of the lease made thereunder was to constitute the Reading Company the public agent for the operation of the railroad, and to prevent the Minehill Company from carrying on business in respect of the maintenance and operation of the railroad so long as the lease shall continue. And it is the Reading Company, and not the Minehill Company, that is "doing business" as a railroad company upon the lines covered by the lease, and is taxable because of it. The Corporation Tax Law does not contemplate double taxation in respect of the same business.
The government points out that, by the terms of the act, the Reading Company is allowed to deduct from its gross income the $252,612 paid annually to the Minehill Company for rentals under the lease, with the result that, unless the latter company is held to be "doing business" as a railroad company, both lessor and lessee entirely escape from taxation on $252,612 of income. But an examination of the act shows that this is the precise result intended by Congress.
"Net income shall be ascertained by deducting from the gross amount of the income . . . (first) all the ordinary and necessary expenses actually paid within the year out of income in the maintenance and operation of its business and properties, including all charges, such as rentals or franchise payments, required to be made as a condition to the continued use or possession of property."
to such as are paid to companies that are subject to the tax imposed by the act, and yet the suggestion that it might be so confined was present in the mind of the draftsman, for below there is a provision for deducting "(fifth) all amounts received . . . as dividends upon stock of other corporations . . . subject to the tax hereby imposed." In short, Congress said, and intended to say, as to rentals paid for the use or possession of property and franchises employed by the lessee company in a business taxable under the act, let there be a deduction by the lessee of the amount of such rentals whether the lessor is within the reach of the taxing scheme or not.
We conclude that the Minehill Company was not taxable with respect to the railroad business.
insurance business, and with respect to the carrying on thereof."
"The tax is not payable unless there be a carrying on or doing of business in the designated capacity, and this is made the occasion for the tax, measured by the standard prescribed."
There remains to be considered the fact that the Minehill Company has a considerable amount of personal assets known as its "contingent fund," in the form of investments (the amount and particulars are not specified), from which it derives an annual income of about $24,000; that it keeps a deposit in bank, receives and collects interest upon such deposit, and distributes the income thus received, as well as the rentals received from the Reading Company (after payment of expenses and taxes) to its stockholders in the form of dividends.
"The measure of such tax may be the income from the property of the corporation, although a part of such income is derived from property, in itself, nontaxable.
And again, after referring to previous decisions (220 U.S. 220 U. S. 165):"
"It is therefore well settled by the decisions of this Court that, when the sovereign authority has exercised the right to tax a legitimate subject of taxation as an exercise of a franchise or privilege, it is no objection that the measure of taxation is found in the income produced in part from property which, of itself considered, is nontaxable. Applying that doctrine to this case, the measure of taxation being the income of the corporation from all sources, as that is but the measure of a privilege tax within the lawful authority of Congress to impose, it is no valid objection that this measure includes, in part at least, property which, as such, could not be directly taxed. . . . The tax must be measured by some standard, and none can be chosen which will operate with absolute justice and equality upon all corporations. Some corporations do a large business upon a small amount of capital; others with a small business may have a large capital. A tax upon the amount of business done might operate as unequally as a measure of excise as it is alleged the measure of income from all sources does. Nor can it be justly said that investments have no real relation to the business transacted by a corporation. The possession of large assets is a business advantage of great value; it may give credit which will result in more economical business methods; it may give a standing which shall facilitate purchases; it may enable the corporation to enlarge the field of its activities and in many ways give it business standing and prestige."
no support for the contention that the mere receipt of income from property, and the payment of organization and administration expenses incidental to the receipt and distribution thereof, constitute such a business as is taxable within the meaning of the Act of 1909. The distinction is between (a) the receipt of income from outside property or investments by a company that is otherwise engaged in business, in which event the investment income may be added to the business income in order to arrive at the measure of the tax, and (b) the receipt of income from property or investments by a company that is not engaged in business except the business of owning the property, maintaining the investments, collecting the income, and dividing it among its stockholders. In the former case, the tax is payable; in the latter not.
And so, upon the whole, we think the court below correctly held that the present case is governed by Zonne v. Minneapolis Syndicate, 220 U. S. 187, and that the taxes under consideration were unlawfully imposed.
I am unable to concur in the opinion of the majority of the Court. It seems to me that, applying the principles laid down in the Corporation Tax Cases, 220 U. S. 107, the Minehill & Schuylkill Haven Railroad Company is a corporation doing business within the meaning of the law, and subject to the tax.
We are advised by a brief filed by an amicus curiae that the decision in this case will affect a number of cases now pending, and, owing to its importance as affecting the public revenue, I feel justified in briefly stating the grounds of my dissent.
law upon every corporation organized for profit, having a capital stock represented by shares, and engaged in business in any state. Every such corporation is subject to a special excise tax with respect to the carrying on or doing of business, equivalent to one percent upon the entire net income over and above $5,000, received by it from all sources during the taxing year. This tax, it was held in 220 U.S., was constitutionally imposed, and rests upon the doing of business with the advantages which inhere in the peculiarities of corporate or joint stock organization. As was said in that case, doing business is a very comprehensive term, embracing about everything in which a person can be employed, and the definition of business as "that which occupies the time, attention, and labor of men for the purpose of a livelihood or profit" was adopted and approved. As is said in the majority opinion, the precise question in this case is, was the Minehill Company doing business in the sense in which the term is employed in the law, or had it gone out of business in such substantial sense that it was no longer subject to the law?
for the year ending December 31, 1909, as interest on deposits, and from its contingent fund, was $24,471.07. The nature and amount of the investments are not specified in the record, but they must be very considerable in view of the annual income derived.
We are therefore brought to the direct question, is a live corporation which, though it has leased its railroad property for a term of years, maintains and has agreed to maintain its corporate organization, collects and distributes an annual rental of $252,612, keeps and maintains an office and an office force at large expense, deposits money upon interest, and receives and distributes the earnings thereof, invests a large fund which, together with interest on deposits, yields over $24,000 a year, doing business within the meaning of the corporation tax act? The amount of business done is utterly immaterial. The doing of any business with the advantages which inhere in corporate organization brings the corporation within the terms of the act. Such was the ruling in the Flint case, after full consideration by this Court of the terms and scope of the law.
itself from any activity in respect thereof, and therefore did not come within the scope of the act.
In the present case, the corporation has not disqualified itself from business activity. It maintains a considerable force in active employment, and, entirely apart from the receipts from the railroad lease, so deposits and invests its funds as to create, in these days of low interest upon good investments, an annual income of over $24,000, as appears by its return. The amount derived from investments depends upon the exercise of judgment and the efficiency of management. If business includes everything that occupies the time, attention, and labor of men for profit, it seems to me that these facts show that the Minehill Company is carrying on business in the present instance.
I am unable to agree that a corporation whose officers and agents are engaged in its behalf in selecting banks in which to deposit large sums of money, in passing upon and choosing securities in which corporate funds are to be invested, and then in distributing the interest and profits accruing therefrom among its stockholders, is not engaged in doing business in the sense that the corporation in the Zonne case was not.
and was in receipt of no other income than that derived from its rental, and had no assets other than that property and the income thereof. It was held to be doing business within the meaning of the act. The Minehill Company, it seems to me, is doing more and a greater variety of business than was attributed to the Park Realty Company as the basis of the assessment upon it. Others of the realty companies held taxable in the Corporation Tax Cases, it seems to me, were engaged in as little business activity as is the corporation herein involved.
With deference to the majority opinion, I think the Minehill Company, upon the facts here adduced, is engaged in business, and ought to be held liable to the tax.
MR. JUSTICE HUGHES and MR. JUSTICE LAMAR concur in this dissent.

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