Court Opinion

ID: 8805418
Source: CourtListenerOpinion
Date Created: 2022-11-26 14:46:34.586036+00
Date Added: 2024-06-11T17:04:04.844327
License: Public Domain

ADDRICH, District Judge
(dissenting). There are several questions, but I disagree with the majority opinion only upon the single. *628question 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 tire 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 word.s, 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 tire 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 toi 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., 242 U. S. 503, 516, 37 Sup. Ct. 201, 61 L. Ed. 460, the decision in each case must depend upon the particular facts before the court, and the same idea would hold in a case of this kind, because the real question is whether, under the particular circumstances of this case, the income was the income of the West End Railroad, received in its capacity as a corporate entity or in its corporate right, and so clearly so as to make the corporation subject to the income tax provision in respect to corporations. Can it be said that Congress clearly intended to subject a corporation, situated as the West End is, to the income tax created by the act of 1913? I think *629not. The income, under the circumstances, was not the income of the corporation, but of those who, under the lease, succeeded to the right of the corporation to receive an upset or stipulated sum for the use of its property.
The lease in question is dated December 9, 1897, and is for the period of 24 years, 8 months, and 9 days, and by its terms the West End granted and transferred its railway, and property of every description, reserving to itself only an obligation created in its favor under the lease whereby the Elevated was to pay yearly $7,500 (later $8,600) in order that the West End might maintain an office and an organized existence for certain limited purposes. The West End, in every practical sense, turned over to the Elevated its railway system and its right to operate and do the business contemplated by its charter, and thus became a mere shell, taking no part in the actual operations of the system, and expressly limiting its income to the $7,500, or the $8,600, provided under the lease for special purposes. Under the lease arrangement the shareholders were provided for and protected by a provision whereby each holder of common stock was to receive for each share direct from the Boston Elevated $1.75 each year during the continuance of the lease, and each holder of preferred stock $2 per share each year. Neither the income of the individual shareholder of the West End nor the obligation of the Elevated to pay depended at all upon earnings; and, so far as doing business for profit was concerned, the activities of the West End had ceased as the result of the lease transferring the right fi} operate. Here is a perfectly legitimate income status created before the law, in which it is not only contemplated, but expressly provided, that certain and stated sums which are not to be affected by earnings, or by statutory methods and deductions prescribed for the ascertainment of taxable corporate income, shall be paid directly to the shareholders.
In view of such complete transfer of the corporate right to do business and to receive income based upon operations and earnings, and in view of its complete surrender and transfer to the shareholders of its right to receive income as a corporate entity, either from its operations or under the lease, it seems extremely fictional to say that the money paid to the shareholders under the terms of the contract was the income of the West End Railroad within the meaning of the statutory provision in question. It is a significant fact that the sum paid to the shareholders is not a sum necessarily based upon the income from the operations of the West End system by the Boston Elevated, nor is it to be ascertained by the contemplated and prescribed statutory method of deducting from the gross amount of income the ordinary and necessary expenses of maintenance and operation of its business, but it comes as an arbitrary sum established by contract, and the shareholders are apparently entitled to have it without regard to whether the operations of the West End by the Boston Elevated under the lease results in net profit or income; and, indeed, without regard to the question whether the operations result in loss. The fact that the statute carefully prescribed the manner in which corporate income, against which the law was intended to be directed, should be ascertain*630ed, has a very important bearing upon the question whether it was intended that the act, in respect to corporate tax liability, should .operate upon definitely established income to shareholders who succeed to the income rights of the corporation, and whose rights under such succession are to receive a definitely established sum under the contract.
There has been some discussion of the question whether these sums received by the shareholders are income in the nature of profits resulting from operations, or whether they are rents. The lease treats the payments to the shareholders as payments of rent, but, in the statutory sense, whether it is rent based upon profits or not is of little consequence. Under the stipulation the income arises or accrues directly to the shareholders, and this is so regardless of whether it is strictly rent, or income based upon profits, and quite independent of the question whether the operations under the lease result in profit or loss.
Though shareholders receive corporate fruits through dividends, they are in every substantial sense real owners of corporate rights and properties, and' under proper limitations and adjustments are entitled to .the fruits of the corporate business. Whenever a corporation in its artificial corporate capacity under statutory creation receives profits from the earnings of a system, it receives something which it holds in trust for the benefit of the shareholders; and it is-difficult to see any reason why it may not transfer the right to receive income or profit to the real owners. And it is difficult to discover that the lease in question created agency relationship between the West End and the Elevated in respect to the payments to the shareholders, as that was something done by the Boston Elevated to discharge an obligation created in their favor by the lease and was payment of money which the shareholders were entitled to receive under their own enforceable right from the Boston Elevated.
The shareholders do not, in any sense that I can see, receive the stipulated sums from the Elevated as”an agent of the West End; but rather in their own right as owners of stock. True enough, when the entity is in control of the property by consent of the shareholders, managing for business purposes, and for purposes of income and dividends, the corporation may be taxed for the income; but when, within the scope of its corporate agency, it turns over its management to another, and creates rights in the shareholders to receive stipulated sums because they own certain shares of stock which represent the. property, it creates for them, as owners, property rights as principals, quite independent of any agency relationship between the lessor and lessee.
The rights of the shareholders must be enforceable by them under the obligation created in their favor (Penn. Steel Co. v. New York City R. Co., 198 Fed. 721, 747-751, 762-765, and cases cited, page 762, note 22, 117 C. C. A. 503, p. 544, note 22; Forbes v. Thorpe, 209 Mass. 570, 581, 95 N. E. 955), because in every substantial sense they are the beneficiaries entitled to receive the fruits of the corporate property.
*631Tlie whole scheme of the lease transaction was, first, to put the management of the corporate property, together with its income resulting from operation, out of the hands of the West End and into the hands of the Elevated, and, second, under the transfer, to create a definite income in favor of the shareholders, which was to he not only definite in amount, hut definite in the right of the shareholder to receive it directly; and thus the income received by the shareholders from the Elevated was their own income and not the income of the West End, which had transferred its right to receive it from the operations of road to the Elevated, and had created a distinct right in the shareholders to receive it by virtue of the lease.
In this case, as in the case of Rensselaer & S. R. Co. v. Irwin (D. C.) 239 Fed. 739, the lease was executed long before the enactments of the statutes in respect to corporate income, and therefore it can be said here, as there, that no fraud on the law was intended.
The Rensselaer Case was decided upon the theory that the payments provided lor by the lease were based upon profits and were payments as rents, and, though paid direct to the stockholders, that they were in legal effect received by the plaintiff corporation, and were the corporation’s net income within the meaning of the statute. This reasoning was apparently based upon the idea that, if any other view was held, corporations would escape payment of an income tax by leasing their properties and providing for the payment of their surplus earnings direct to the stockholders, and that few corporations would pay an income tax.
It is not apparent that the danger pointed out justifies the extreme fiction involved in holding that actual payments to stockholders in a contract situation like the one here, and one involving good faith, were in legal effect, contrary to the fact, payments to the corporation. It is not necessary to say whether such danger, if a real one, would justify the fiction, because it may be said that the apprehended danger is not real, and this is so because, when a corporation sees fit to go out of the practical management of its system and transfer its earning capacities to another corporation, which operates for profit and income, that corporation would doubtless become a corporation subject to the income tax, because it would be bound to pay the statutory tax on net income arising or accruing from all sources, and this is so because, whenever profit results from the rightful operation of the leased system, it would be a source of income contemplated by the statute creating the tax.
And, again, as the West End Railroad, as an artificial entity, had ceased its business activities and turned over to the shareholders the right to receive an income based upon a contract right, not to be affected by the contemplated statutory calculations and deductions, it is not plain to see why the shareholders would not be subject to tax after the income had actually reached them.
It is, of course, not a question here whether the Elevated is liable to be taxed, or whether the individual shareholders of the West End are so liable because they are not parties. The precise question is whether the payments to the shareholders of the stipulated definite sums *632named in the lease were an income of the West End as a corporation within the meaning of the statute, and the supposed question in respect to the liability of the Elevated and that of the individual shareholders to be subjected to a tax, are only referred to as illustrations which tend to solve the question of the liability of the West End.
In a situation like this, speaking generally, the income from the operations of the West End first inures to the lessee operating under the lease, and then, under .the terms of the lease, to the shareholders in the lessor corporation. It is difficult to see why the earnings of the West End, less the operating expenses, the amount paid to the shareholders, under the contract, and other proper deductions, if any, are not income of the Elevated under the lease as income within the statutory meaning of “income from all sources,” and it is difficult to see why the dividends deducted by the Elevated from the earnings of the West End, when paid to thé shareholders, should not become tire income of the individual shareholders and taxable to them as such. This would not be double taxation, because the amounts of the dividends were deducted from.the gross earnings under the lease, but, if taxed to both the shareholders and the West End as iftcome, it would be double taxation in respect to the same business, something which, as said in McCoach v. Minehill, 228 U. S. 295, 304, 33 Sup. Ct. 419, 57 L. Ed. 842, could not have been contemplated.
Anderson v. Morris E. R. Co., 216 Eed. 83, 132 C. C. A. 327, furnishes very little, if any, support to the claim that the contemplated and stipulated payments to the shareholders under the circumstances of this case were the income of the West End. That was a case where the reasoning had reference to the question whether the corporation was engaged in business within the meaning of the law of 1909, and it was there said that the fact that the payments were by tire lessee to the stockholders would not prevent the act — meaning, of course, the act of 1909 — from applying to the money so paid, if the other conditions of the act make its terms applicable, meaning, as it would seem, that it would be considered, among other things, upon the question whether the corporation was doing business. The court in that case could not and did not determine that income paid to stockholders, under circumstances like those existing in the case now under consideration, was income of the leasing corporation. And that is so because that court had neither such a question nor the statute of 1913 before it.
In McCoach v. Minehill R. Co., 228 U. S. 295, 33 Sup. Ct. 419, 57 L. Ed. 842, the corporation was leased, and the lessor maintained its corporate existence to collect and distribute to its stockholders the rental from the lessee, and also dividends from investments; yet it was held that it was not doing business within the meaning of the Corporation Tax Act of 1909.
The case of Lewellyn v. Pittsburg, B. & L. E. R. Co., 222 Fed. 177, 184 (137 C. C. A. 617), in its reasoning as to the question whether the leasing corporation was doing business, among other things, says:
“The plaintiff railroad corporations received no income from railroads operated by themselves, and expended none in the operation of railroads or for any other purpose. Receiving no income and disbursing none, there was, of course, *633no gross income fro-m which to determine net income, and no means. to measure an excise tax as provided by the statute. Therefore, in being without income from operating their railroads, the lessor railroad corporations to this extent at least were outside of the scope of the statute.”
While the reasoning of these cases has no direct bearing upon the question here, yet, by holding that the corporations under the dividend status with which they were respectively dealing were not doing business within the meaning of the statute to which the cases relate, it does through analogy sustain the idea that the West End was out of business, and that it had transferred the income under the lease to the shareholders.
The West End was not operating. It was, in fact, receiving no income either from its own operations or from the operations of others. It had bodily transferred its property, and its management, and the right to receive income, and it is difficult to find Jiow it can reasonably be said that they have a gross income from which the statutory deduction can be made in order to get at the measure of net income contemplated by the statute of 1913.