Source: http://masscases.com/cases/sjc/310/310mass659.html
Timestamp: 2019-04-20 00:17:32+00:00

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EASTERN MASSACHUSETTS STREET RAILWAY COMPANY vs. BOSTON ELEVATED RAILWAY COMPANY.
In a lease in writing by one street railway company to another in 1903, at a stipulated rent based on replacement values of the leased property, of a part of its railway with the right to receive all revenue, income and profits from the "demised premises," the lessee to operate the "demised railway" at its own expense, a provision that the lessee should " pay or furnish to the lessor the money necessary to pay all taxes of every description Federal, State and municipal, levied upon" specified kinds of property and upon "the income" from the "demised premises," did not require the lessee to refund to the lessor any part of a Federal income tax the lessor had paid by reason of its receipt of the stipulated rent.
The facts, that the lessee, under a lease made in 1903 and containing a covenant by him to reimburse the lessor for certain taxes, reimbursed the lessor for Federal income taxes upon the rent received by him from 1909 to 1917 but not thereafter, did not require an interpretation of the covenant, different from that called for by its language, on the question whether the lessee was required by its to reimburse the lessor for such tax on the rent for the years 1921 and following.
CONTRACT. Writ in the Superior Court dated November 15, 1930.
The action was heard upon a case stated by Greenhalge, J., who ordered judgment for the defendant and reported the action.
P. Nichols, (J. A. Boyer & P. G. Carleton with him,) for the plaintiff.
C. W. Mulcahy, (W. B. Downey & J. F. Desmond with him,) for the defendant.
the Old Colony Street Railway Company leased a certain portion of its lines of railway and other property appurtenant thereto in the city of Boston to the Boston Elevated Railway Company. The demised property is described in the lease as all the lessor's "railway and branches thereof" situated in a certain part of Boston, with a detailed description thereof, and including therein all the lessor's "licenses, rights, franchises, easements, privileges and appurtenances belonging or appertaining thereto, or conveniently used in connection therewith" -- with certain exceptions not here material -- "Together with the right to demand and receive all rents, tolls, revenue, income and profits from the demised premises, subject to the provisions hereinafter contained and except as hereinafter otherwise provided; together with the benefit of all rights secured to the Lessee under the following provisions in this instrument contained." The rent reserved under the lease, to be paid by the lessee to the lessor, was to be "based upon the adjusted replacement value of the property demised as of the date of this agreement and upon the adjusted betterment value of the property from time to time," and was "a sum equal to six and one-eighth (6 1/8) per centum per annum upon the adjusted replacement value of the property demised, and a sum equal to four (4) per centum per annum upon the adjusted value of betterments from time to time." On or about May 31, 1919, the Eastern Massachusetts Street Railway Company succeeded to all the right, title and interest of the Old Colony Street Railway Company, and its successor, Bay State Street Railway Company, under said lease.
The Eastern Massachusetts Street Railway Company (herein referred to as the lessor) brought this action of contract against the Boston Elevated Railway Company (herein referred to as the lessee) to recover the sum of $5,124.68 included in the amount of Federal income tax paid by the lessor for the year 1926. The case was heard upon a case stated, and judgment was ordered for the defendant. At the request of the parties the case was reported to this court.
The primary question for decision is whether the lessee is liable to the lessor for the Federal income tax paid by the lessor with respect to the rental received by the lessor under the lease for the year 1926. A secondary question, if the lessee is so liable, relates to the amount for which such lessee is liable. The case stated contains the following statement: "The parties have agreed to submit to the court the facts bearing upon said issue in respect to a typical year 1926, and have also agreed, if the court finds the defendant obligated to pay any portion of the plaintiff's income tax for that year, to adjust between themselves on the basis of the court's decision the payments in respect to Federal income taxes to be made by the defendant to the plaintiff for the years since and including 1921."
demised property and subject to local taxation in said Boston; and also any such taxes by law required to be deducted from any amounts payable as dividends or otherwise to the owners of such portion of the Lessor's capital stock."
The lessor reported in its Federal income tax return for the year 1926, upon which its Federal income tax for that year was assessed, a total gross income of $9,797,816.94, and deductions from income of $9,068,775.80, leaving a net income of $729,041.14, the tax upon which at the statutory rate of thirteen and one half per cent amounted to $98,420.55. Included in this total gross income was $37,960.56, "Rental paid under lease by Boston Elevated Railway Company for use of West Roxbury property" -- the lease here in question. The lessor seeks in this action to recover $5,124.68, being thirteen and one half per cent of the rental received under this lease.
is brought, such tax must be included in at least one of the six classes of taxes specifically described in article 1.
The rent of the demised property is not referred to in terms in article 1 of the lease whereby taxes were assumed by the lessee. In this respect the lessee's covenant relating to taxes differs from the covenants considered in Suter v. Jordan Marsh Co. 225 Mass. 34, Kimball v. Cotting, 229 Mass. 541, 542, Kimball v. Cotting, 234 Mass. 172, and Kimball v. Maddison, 286 Mass. 277, 279. But the question of the liability of the lessee to the lessor under this article of the lease must be determined in accordance with the principle stated in Boston & Providence Railroad v. Old Colony Railroad, 269 Mass. 190, 195, that, if "it fairly appears from the lease as a whole that the parties intended to impose upon the lessee ultimate obligation to pay an income tax assessed upon the lessor in respect to the rental, that intention will be given effect, although there is in express words no provision to that effect in the lease."
The lessor relies particularly upon the lessee's covenant to "pay or furnish to the Lessor the money necessary to pay" taxes upon "the income therefrom," obviously meaning the income from the demised property. Undoubtedly, from the standpoint of the lessor, the rent received by it from the lessee may properly be described as the lessor's "income from the demised property." See Stony Brook Railroad v. Boston & Maine Railroad, 260 Mass. 379, 384; DeBlois v. Commissioner of Corporations & Taxation, 276 Mass. 437, 439; New York v. Graves, 300 U.S. 308, 312-316. But, on the other hand, from the standpoint of the lessee, its operating revenue and other revenue, with proper deductions therefrom, may properly be described as its "income from the demised property." The question for decision on this aspect of the case, therefore, is whether "the income therefrom," that is, from the demised property, taxes upon which are assumed by the lessee, as the words are used in article 1, means or includes the lessor's income therefrom in the form of rent paid by the lessee, or is limited to the lessee's income from the demised property.
natural interpretation of the tax covenant that the words "the income therefrom," that is, from the demised property, refer to the income that by the demise the lessee was entitled to demand and receive, that is, to income of the lessee. Obviously the lessee was not entitled "to demand and receive" the rent payable under the lease by the lessee to the lessor.
The inclusion in the tax covenant of other possible subjects of taxation is not in conflict with this conclusion. There was no demise, in terms, of "the business thereof," that is, of the demised property, but the demise of the property would import that the business of the railway was to be operated by the lessee, and the lease contains many provisions for operation by the lessee of the demised property. The habendum clause immediately preceding article 1 in the lease fixes the time of beginning of the ninety-nine year term of the lease and of "the operation of the demised railway by the Lessee," and a part of the lease is described as an "operating agreement." The natural interpretation of the words "the business thereof," meaning "the business of the demised property," is "the business of operating its . . . [railway] vested in the lessee under the lease" and not the business of the lessor in receiving the rent of the demised premises. See Boston & Providence Railroad v. Old Colony Railroad, 269 Mass. 190, 198-199. The use of the phrase "the business thereof" in this sense in close connection with the phrase "the income therefrom" has some tendency to show that, as the former phrase refers to the business of the lessee in operating the demised property, so the latter phrase refers to the income of the lessee derived from such operation.
imposing the burden upon the lessee of "any such taxes," referring to taxes upon capital stock of the lessor, "by law required to be deducted from any amounts payable as dividends or otherwise to the owners of such portion of the Lessor's capital stock," evidently was for the same purpose. These provisions raise no implication that the lessee is to bear the burden of taxation resting upon the lessor by reason of its right to receive rent under the lease.
with considerable particularity in the provision relating to such expenses. Even though such expenses are of broad scope, they do not purport to include expenses of the lessor not relating to the use and operation of the demised property by the lessee. In this respect the lessee's covenant to pay expenses is more restricted than the covenant considered in Pittsfield & North Adams Railroad v. Boston & Albany Railroad, 260 Mass. 390. The provision relating to expenses, therefore, tends to support the conclusion that the taxes, liability for which the lessee assumed, are limited to taxes relating to the use and operation of the demised property, including, of course, taxes levied directly thereon, or indirectly through a tax upon a portion of the capital stock, and consequently that the taxes levied upon "the income therefrom," that is, from the demised property, are those levied upon the income of the lessee derived from the use and operation of such property.
business thereof," that is, of the demised property, carried on by the lessee.
Clearly none of the taxes described in the lessee's tax covenant, other than those upon the income from the demised property already considered, includes the Federal income tax upon the rent received by the lessor under the lease. Such a tax is not a tax on "the demised property," or "the rights and franchises thereto pertaining," whether levied directly on the property or reaching such property indirectly by a tax upon the capital stock of the lessor. Codman v. American Piano Co. 229 Mass. 285, 290. Stony Brook Railroad v. Boston & Maine Railroad, 260 Mass. 379, 384. Nashua & Lowell Railroad v. Boston & Maine Railroad, 260 Mass. 387. Nor is such a tax a tax upon the capital stock or the corporate franchise of the lessor, considered in accordance with the true nature of the tax and not merely as a medium of reaching for taxation the property of the lessor. Stony Brook Railroad v. Boston & Maine Railroad, 260 Mass. 379, 384. Nashua & Lowell Railroad v. Boston & Maine Railroad, 260 Mass. 387. Finally, for reasons already pointed out, such an income tax is not a tax on "the business thereof," that is, of the demised property. Boston & Providence Railroad v. Old Colony Railroad, 269 Mass. 190, 198-199.
upon whether such tax is upon a subject of taxation described in the tax covenant. If it had been the purpose of the parties to the lease to include among these subjects of taxation the rent received by the lessor under the lease, it would have been simple to have used words expressive of that purpose. See Stony Brook Railroad v. Boston & Maine Railroad, 260 Mass. 379, 384. Such a provision referring in terms to taxes upon "rent" is not uncommon. See Suter v. Jordan Marsh Co. 225 Mass. 34; Kimball v. Maddison, 286 Mass. 277, 279. And the same purpose could have been attained without the use of the word "rent" if taxes upon "income" of the lessor had been referred to. See Boston & Providence Railroad v. Old Colony Railroad, 269 Mass. 190, 195. Even a reference to "expenses" of the lessor might conceivably have been sufficient. See Pittsfield & North Adams Railroad v. Boston & Albany Railroad, 260 Mass. 390, 395. As already pointed out, the tenor of this tax covenant is to impose upon the lessee the burden of expenses and taxes arising out of the use and operation by the lessee of the demised property, including taxes upon such property. The lessor demised the property to the lessee to be used and operated by the lessee with its attendant burdens. The language of the tax covenant does not import an assumption by the lessee of the further burden of paying such part of the lessor's Federal income tax as is imposed upon the lessor by reason of the receipt by it of rent under the lease.
provide for the payment of additional rent by the lessee beyond the amount of the rent so specifically fixed. United States v. Boston & Maine Railroad, 279 U.S. 732, 734. See also Old Colony Trust Co. v. Commissioner of Internal Revenue, 279 U.S. 716. An intention to add to the rent in this manner is not lightly to be implied. The parties to the lease "did not provide, as they might have done, that the rental was in all events and at every hazard to be a net amount always available without diminution for any cause." Boston & Providence Railroad v. Old Colony Railroad, 269 Mass. 190, 197. Compare European & North American Railway v. Maine Central Railroad, 135 Maine, 338. And there is nothing in the lease indicating that the amount of the rent thereby reserved was fixed with relation to dividends or other payments to be made by the lessor, and thus disclosing an intention that such amount should always be "available [to the lessor] without diminution for any cause."
260 Mass. 379, 383-384, that a lessee would be liable for the lessor's Federal income taxes upon rent received by the lessor under a lease whereby the lessee covenanted to pay taxes upon the income of the lessor. The present case does not fall within this principle for, as we interpret the lease now in question, the covenant of the lessee to pay taxes upon "the income therefrom," that is, from the demised property, is limited to the taxes, however assessed, upon income derived by the lessee from the use and operation of such property under the lease. The Circuit Court of Appeals, in Whitlock v. Boston & Maine Railroad, 29 Fed. (2d) 351, 353, held the lessee liable for the lessor's Federal income taxes on rent received by the lessor under a lease where such lessee had covenanted to pay "all taxes, assessments, and charges whatsoever" that might be imposed upon the lessor "on account of its property, franchise, capital stock, or otherwise," relying upon the word "otherwise" used in the covenant -- a word that does not occur in the tax covenant now under consideration. While it has been said that the "rule prevalent in this Commonwealth is not so inelastic" as that stated in some of the cases in other jurisdictions (Boston & Providence Railroad v. Old Colony Railroad, 269 Mass. 190, 195), it is not to be stretched to impose a liability on the lessee in a case like the present.
was held to include Federal income taxes of the lessor. The court apparently thought this language sufficient to support the conclusion, but it receives strong support from the further language of the covenant "it being the intent of the parties that the lessor shall receive the aforesaid rentals net and free from any sort of tax or deduction." And there are other circumstances in the case tending to support the conclusion. So far, however, as the case is not distinguishable from the present case we cannot follow it. See also Terminal Investment Co. v. Pope Estate Co. 122 Cal. App. 281, 284, where there was a provision for a "net income to the lessor . . . equal in amount to said rents."
covenant from that which we reach upon an examination of its language in the light of the lease as a whole. Compare Pittsfield & North Adams Railroad v. Boston & Albany Railroad, 260 Mass. 390, 393-394, 397-398.

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