Case Name: PEOPLE ex rel. INTERBOROUGH RAPID TRANSIT CO. v. WILLIAMS, State Comptroller
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1910-05-04
Citations: 123 N.Y.S. 137
Docket Number: 
Parties: PEOPLE ex rel. INTERBOROUGH RAPID TRANSIT CO. v. WILLIAMS, State Comptroller.
Judges: 
Reporter: West's New York Supplement
Volume: 123
Pages: 137–143

Head Matter:
PEOPLE ex rel. INTERBOROUGH RAPID TRANSIT CO. v. WILLIAMS, State Comptroller.
(Supreme Court, Appellate Division, Third Department.
May 4, 1910.)
1. Taxation (§ 150 )—Franchise Tax—Corporations Included—“Surface Railroad.”
Under Tax Law (Laws 1896, c. 908) § 185, imposing a franchise tax on companies “operating any elevated railroad or surface railroad,” an underground street railroad is not to be classed as a “surface road” within the meaning of the statute merely because for a short distance it may run on the surface of the ground.
[Ed. Note.—For other cases, see Taxation, Cent. Dig. §§ 267-269; Dec. Dig. § 150.*]
2. Taxation (§ 197*)—Exemption—Construction of Statutes.
A statutory exemption from taxation should be given a fair construction, in order to carry out the real purpose for which the exemption was . allowed.
[Ed. Note.—For other cases, see Taxation, Cent. Dig. §§ 315, 316; Dec. Dig. § 197.*]-
3. Taxation (§ 394*)—Franchise Tax—Gross Earnings—Basis for Assessment.
The tax on elevated and surface street railroads imposed by Tax Law (Laws 1896, c. 908) § 185, providing that every corporation owning or operating any elevated or surface railroad not operated by steam shall pay to the state for the privilege of exercising its corporate franchise, or carrying on its business, an annual tax which shall be 1 per centum on its gross earnings from all sources, being a tax for the privilege of exercising a corporate franchise, and not one upon earnings or property, earnings on property exempt from direct taxation are not to be deducted in stating the tax, and hence a corporation operating an elevated and surface street railroad is not entitled to a deduction for an underground railroad operated by it in connection with its other roads.
[Ed. Note.—For other cases, see Taxation, Cent. Dig. § 669; Dec. Dig. § 394.*]
4. Taxation (§ 124% )—Tax on Corporate Dividends—Operation of Road by Lessee—“Employed.”
Under Tax Law (Laws 1896, c. 908) § 185, providing that every corporation owing or operating any elevated or surface railroad not operated by steam shall pay to the state for the privilege of exercising its corporate franchise, or carrying on its business, 3 per centum upon the amount of dividends declared or paid in excess of 4 per centum “upon the actual amount of paid-up capital employed by such corporation,’’ and that any such railroad corporation whose property is leased to another railroad „ corporation shall only be required to pay a tax of 3 per centum upon the dividends declared and paid in excess of 4 per centum upon the amount of its capital stock, a lessee of elevated and surface street railroads is not liable for such tax, since it has no capital stock “employed” in the operation of the road.
[Ed. Note.—For other cases, see Taxation, Dec. Dig. § 124%.*
For other definitions, see Words and Phrases, vol. 3, pp. 2377-2380; vol. 8, p. 7649.]
5. Taxation (§ 204*)—Exemption—Nature of Right—“Property Right.”
Immunity from taxation is a “property right.”
[Ed. Note.—For other cases, see Taxation, Dec. Dig. § 204.* ‘
For other definitions, see Words and Phrases, vol. 6, p. 5729; vol. 8, p. 7770.]
6. Taxation (§ 124%*)—Franchise Tax—Liability of Lessee Corporation.
A corporation operating elevated, surface, and underground street railroads, under a lease from another corporation owning the roads, is liable to the tax imposed by Tax Law (Laws 1896, c. 908) § 185, providing that every corporation owning or operating any elevated or surface railroad not operated by steam shall pay to the state for the privilege of exercising its corporate franchise or carrying on its business an annual tax, which shall be 1 per centum upon its gross earnings from all sources within the state.
[Ed. Note.—For other cases, see Taxation, Dec. Dig. § 124%.*]
Smith, P. J., and Sewell, J., dissenting.
Certiorari by the People of the State of New York, on the relation of the Interborough Rapid Transit Company, against Clark Williams, as Comptroller of the State of New York, to review the determination of such Comptroller, stating a franchise tax under section 185 of the Tax Law against the relator for the years ending Jüne 30, 1907, 1908, and 1909.
Determination modified.
Argued before SMITH, P. J., and KELLOGG, COCHRANE, SE-WELL, and HOUGHTON, JJ.
James L. Quackenbush (Ralph Norton, of counsel), for relator.
Edward R. O’Malley, Atty. Gen. (Edward Letchworth, Deputy, of counsel), for respondent.
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to date, & Kep’r Indexes
For other cases see same topic & § number in Dec. & Am. Digs. 1907 to date, & Rep’r Indexes

Opinion:
JOHN M. KELLOGG, J.
The statute is question imposes this tax only on elevated railroads, or surface railroads not operated by steam. The mere fact that an underground railroad for a short distance may run upon the surface, and for another short distance upon an elevated structure, does not make it a surface or elevated railroad. Its distinctive character is an underground railroad. It is not therefore taxable under this statute. The relator is exempt from taxation in respect to anything it does pursuant to the contract with the city under which the subway was constructed and is operated. People ex rel. Interborough Rapid Transit Co. v. Tax Com'rs, 126 App. Div. 610 110 N. Y. Supp. 577, affirmed 195 N. Y. 618, 89 N. E. 1109.
The statutory exemption should be given a fair construction in order to carry out the real purpose for which it was allowed. The exemption from taxation was an inducement which led to the construction and operation of the subway, and should be fairly observed.
It follows, therefore, that, aside from the fact that the relator is operating the Manhattan Elevated Railroad as lessee, it would not be subject to this tax. The statute provides that the tax against the owning or operating company shall be 1 per centum upon its gross earnings from all sources within the state.' The petition shows that the relator is operating the elevated railroads of the Manhattan Company, and the gross earnings of the relator are therefore made up of its earnings from its subway and from the Manhattan Elevated Roads.
This tax is not upon earnings or property, but is for the privilege of exercising a corporate franchise in carrying on the business. The fact that the relator, with reference to the subway, is exempt from taxation except as to the real estate owned by it, does not permit us, in ascertaining the gross earnings of the company from all sources, to eliminate the earnings of the subway. The earnings are used simply as a method of determining what the use of the franchise is worth; a measure merely to determine how much tax should be paid upon the franchise. Earnings from patents, United States bonds, or other property expressly exempt from taxation, are not to be excluded in determining the amount of the earnings of a corporation which is to be used in fixing the value of its franchise. People ex rel. U. S. P. P. Co. v. Knight, 174 N. Y. 475, 482, 67 N. E. 65, 63 L. R. A. 87.
The gross earnings of the relator from all sources within the state must be taken into account in computing this tax.
The tax upon the surplus dividend is upon the actual amount of paid-up capital "employed" by the corporation. This means employed by the corporation in the ownership or operation of the road. We assume from the record that the elevated roads are operated under their own charter, and the relator, as lessee, is only interested financially in the net earnings of that corporation after paying the interest upon its bonds and the rental to be paid. A tax is imposed by this section upon the excess dividends of such leased corporation. It is not probable that the Legislature intended by this provision that the lessor company must pay a tax upon its excess dividends for the privilege of operating its railroad, and that the lessee company must pay a tax upon its excess dividends for the privilege of operating the road as lessee, thus making a double taxation. The first part of the section expressly declares that the gross earnings from all sources shall be considered, showing that not only the earnings of the lessee should be computed, but all earnings of the operating company. The latter part of the section omits the general words, and by the use of the word "employed" makes it clear that the excess of dividend is to be considered, so far as the lessee is concerned, only upon the amount of its capital stock, if any, employed in the business. It does not appear that any of the capital stock of the relator is employed in the operation of the elevated road. On the contrary, we infer from the record that the relator receives from the operation of that road more than all it pays on account thereof, so that the lease is a profit to it.
The tax law of 1896 (Laws 1896, c. 908) first made a company operating an elevated or surface road not operated by steam subject to this tax, and eight years thereafter, in 1903, the relator voluntarily, and for its own profit, took the lease of the elevated railroads of the Manhattan Elevated Railway Company, and has since continuously operated them. Immunity from taxation is given to the relator with reference to its subway and its operation thereof, and such immunity is a property right. But when it voluntarily, for its own profit, took the lease of the other railroads and operated them, it made itself subject to any liability for taxation which any other lessee would have incurred by reason of such lease and operation. By taking the lease and operating the leased roads, it voluntarily subjected itself to a tax with reference thereto, in computing which tax its earnings "from all sources" may be considered. The terms of the lease do not appear ; but the petition admits that the relator has continuously operated the elevated railroads as lessee, and this admission brings it within the terms of the taxing statute. • ,
It follows from these views that the relator is liable to pay a tax of 1 per centum on its gross earnings from all sources within the state, including the earnings of the subway as well as its earnings from other sources, and that the excess dividends declared by the relator upon its own stock cannot, upon the facts shown, be taken into consideration in stating the- tax.
The determination is therefore modified by striking therefrom the excess dividend tax on the Interborough stock, and, as so modified, confirmed, without costs.
COCHRANE and HOUGHTON, JJ., concur.