The Delaware Railroad Tax
85 U.S. 206 (1873)

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U.S. Supreme Court

The Delaware Railroad Tax, 85 U.S. 18 Wall. 206 206 (1873)

The Delaware Railroad Tax

85 U.S. (18 Wall.) 206

Syllabus

1. Although it has been repeatedly held by this Court that the legislature of a state may exempt particular parcels of property or the property of particular persons or corporations from taxation, either for a specified period or perpetually, or may limit the amount or rate of taxation to which such property shall be subjected, and that when such immunity is conferred or such limitation is prescribed by the charter of a corporation, it becomes a part of the contract, and is equally inviolate with its other stipulations, yet before any such exemption or limitation can be admitted, the intent of the legislature to confer the immunity or prescribe the limitation must be clear beyond a reasonable doubt. All public grants are strictly construed, and nothing can be taken against the state by presumption or inference. The established rule of construction in such cases is that rights, privileges, and immunities not expressly granted are reserved.

2. Accordingly, a provision in an act of the Legislature of Delaware under which the original Wilmington & Susquehanna Railroad Company was united with the Delaware & Maryland Railroad Company, requiring the new company to pay annually into the treasury of the state a tax of one-quarter of one percent upon its capital stock of $400,000, did not prevent a subsequent legislature from imposing a further or different tax upon the company. The amount designated was only a declaration of the tax payable annually until a different rate should be established.

3. By an act of the Legislature of Maryland, passed in 1831 and its supplement, a corporation called the Delaware & Maryland Railroad Company was created with authority to construct and maintain a railroad from a point on the Delaware & Maryland line to some point on the Susquehanna River, and by the nineteenth section of the act it was provided that the shares of the capital stock of the company should be exempt from the imposition of any tax or burden by the state assenting to the act except upon that portion of the permanent and fixed works of the company which might be within the State of Maryland. By an act of the Legislature of Delaware passed in 1832 and its supplement, another corporation was created called the Wilmington & Susquehanna Railroad Company, with authority to construct and maintain a railroad from a point on the boundary line of Pennsylvania and Delaware to the City of Wilmington and thence towards the Susquehanna in the direction of Baltimore. In 1835, these two companies were, under acts of the Legislatures of Maryland and Delaware, consolidated into one company under the name of the latter -- the Wilmington & Susquehanna

Page 85 U. S. 207

Railroad Company. The act of Delaware authorizing the consolidation on her part provided that the holders of the stocks of the two companies should, when consolidated, hold, possess, and enjoy all the property, rights, and privileges, and exercise all the power granted to and vested in the companies, or either of them, by that law or any other law or laws of that state or of Maryland. The act of Maryland, authorizing the consolidation on her part, contained a similar provision. Held that the purpose of the two provisions was to vest in the new company the rights and privileges which the original companies had previously possessed under their separate charters; the rights and privileges in Maryland which the Maryland company had there enjoyed, and the rights and privileges in Delaware which the Delaware company had there enjoyed; not to transfer to either state and enforce therein the legislation of the other. The new company, after the consolidation, stood in each state as the original company had previously stood in that state, invested with the same rights and subject to the same liabilities. The act of consolidation, so far as Delaware was concerned, had only this effect.

4. The consolidated company above-mentioned was, in 1838, united with two other railroad companies, one called the Baltimore & Port Deposit Railroad Company, chartered by the Legislature of Maryland in 1831, with authority to construct and maintain a railroad from Baltimore to Port Deposit, on the Susquehanna River, and the other called the Philadelphia, Wilmington & Baltimore Railroad Company, chartered by the Legislature of Pennsylvania in the same year, with authority to construct and maintain a railroad from Philadelphia to the Delaware state line. These three companies were, under acts of the legislatures of these states, Delaware, Maryland, and Pennsylvania, consolidated into one company with a common stock, retaining as its corporate name the name of the company chartered by Pennsylvania. The act of the Legislature of Delaware, under which the consolidation was effected, declared that the respective companies should

"constitute one company, and be entitled to all the rights, privileges, and immunities which each and all of them possess, have, and enjoy, under and by virtue of their respective charters."

Held that this latter provision in no respect changed the position with reference to taxation of the now company, in one of the states, from that of the old company in such state.

5. An act of the Legislature of Delaware taxing railroad and canal companies was passed on the 8th of April, 1889. The fourth section of the act provided that every company of the class designated should, in addition to other taxes, also pay to the treasurer of the state for its use, on the first day of July then next and on the first day of July of each year thereafter, or within thirty days from such period, a tax of one-fourth of one percent upon the actual cash value of every share of its capital stock, with a proviso that when the line of the railroad or canal belonging to a company liable to the tax lay partly in the state and partly in an adjoining state or states, the company should only be required

Page 85 U. S. 208

to pay the tax on such number of the shares of its capital stock as would be in that proportion to the whole number of shares, which the length of the road or canal within the limits of the state should bear to the whole length of such road or canal.

Held:

1st. That the tax was not imposed upon the shares of the individual stockholders, or upon the property of the corporation, but was a tax upon the corporation itself, measured by a percentage upon the cash value of a certain proportional part of the shares of its capital stock, a rule which, though an arbitrary one, was approximately just in the case.

2d. That the tax did not conflict with the power of Congress to regulate commerce among the several states nor interfere with the right of transit of persons and property from one state into or through another.

6. The state may impose taxes upon the corporation as an entity existing under its laws as well as upon the capital stock of the corporation or its separate corporate property. And the manner in which its value shall be assessed and the rate of taxation, however arbitrary or capricious, are mere matters of legislative discretion.

7. A tax upon a corporation may be proportioned to the income received as well as to the value of the franchise granted or the property possessed.

8. The fact that taxation increases the expenses attendant upon the use or possession of the thing taxed of itself constitutes no objection to its constitutionality.

9. The exercise of the authority which every state possesses to tax its corporations and all their property, real and personal, and their franchises, and to graduate the tax upon the corporations according to their business or income, or the value of their property, when this is not done by discriminating against rights held in other states, and the tax is not on imports or tonnage, or transportation to other states, cannot be regarded as conflicting with any constitutional power of Congress.

Appeal from the Circuit Court of the United States for the District of Delaware, in which court William Minot filed a bill against the Philadelphia, Wilmington & Baltimore Railroad Company and the State Treasurer and Collector of State Taxes of Delaware to enjoin the collection of certain taxes.

The case was thus:

On the 8th of April 1869, the Legislature of the State of Delaware passed an act taxing railroad and canal companies in the state. The first section of the act provided that all railroad and canal companies, incorporated under the laws of the state and doing business therein, should, on the first day of January then next and on the first day of January

Page 85 U. S. 209

of each year afterwards, pay to the treasurer of the state for the use of the state, in addition to the taxes then imposed by law upon such companies, a tax of three percent upon their net earnings or income received from all sources during the preceding year, with a proviso, that when a line of railroad or canal belonging to any company liable to the tax lay partly in the state and partly in an adjoining state or states, the part or share of such net earnings or income of the company only should be subject to the tax, as would be in that proportion to the whole net earnings or income of the company, which the length of the road or canal within the limits of the state should bear to the whole length of such road or canal.

The fourth section of the act provided that every company of the class designated should, in addition to other taxes, also pay to the treasurer of the state for its use, on the first day of July then next, and on the first day of July of each year thereafter or within thirty days from such period, a tax of one-fourth of one percent upon the actual cash value of every share of its capital stock, with a proviso similar in its character to that of the first section, namely that when the line of the railroad or canal belonging to a company liable to the tax lay partly in the state and partly in an adjoining state or states, the company should only be required to pay the tax on such number of the shares of its capital stock as would be in that proportion to the whole number of shares, which the length of the road or canal within the limits of the state should bear to the whole length of such road or canal.

Another section of the act further provided that every railroad company should also pay to the state treasurer on the first day of January then next, and on the first day of January of each year thereafter, or within thirty days from such period, for the use in the state of every locomotive belonging in whole or in part to the company, and used by it at any time during the preceding year, a tax of $100; and for the like use of each passenger car thus owned and used,

Page 85 U. S. 210

a tax of $25, and of each freight car and truck thus owned and used, a tax of $10.

The act required the president or treasurer of every company liable to these several taxes, to furnish the state treasurer with statements showing its net earnings or income from all sources during the preceding year, the number of locomotives, passenger cars, freight cars of every description, and trucks belonging to the company and used by it in the state at any time during that period, and the number of shares of the capital stock of the company, with an estimate and appraisement of the actual cash value of each share, and to pay the taxes chargeable. The act also made provision for an estimate of the earnings and an assessment of the taxes in case the statement required was not furnished, and for the collection of the taxes by sale of the property of the company, if they were not voluntarily paid.

The defendant, the Philadelphia, Wilmington & Baltimore Railroad Company, is a corporation created under the laws of Delaware, so far as it exists in that state. By connection with other companies with which under one common name it is consolidated by the legislation of Pennsylvania and Maryland, hereafter particularly mentioned, its road extends to Philadelphia in one state and to Baltimore in the other. It is therefore a corporation liable to taxation by the terms of the Act of April 8, 1869, and is within the provisos of both its first and fourth sections.

The tax upon this company imposed by the fourth section became due for the first time in July, 1869, and in October following, in response to demands of the state treasurer, the president of the company furnished to that officer a statement showing that the capital stock of the company consisted of 186,088 shares of the value of $50 each, accompanied by a protest against the legality of the tax. Soon afterwards, Minot, the complainant, a citizen of Massachusetts, and a stockholder in the company, addressed a written communication to its president inquiring whether the company intended to protect his interests as a stockholder by resisting the collection of the tax, and stating that

Page 85 U. S. 211

as the tax was not a legal one, protection against its levy should be provided. This communication was submitted to the directors, who, in answer, resolved that while they protested against the legality of the tax, they declined to take the responsibility of interfering to prevent its collection, leaving the stockholders at liberty to assert their rights in such way as they might think proper. Minot thereupon filed the present bill. Though the immediate occasion of the bill was the apprehended attempt on the part of the State of Delaware to enforce the tax imposed upon the company by the fourth section of the Act of April 8, 1869, the complainant charged that all the taxes imposed by the act in question were illegal, and sought to have the legislation imposing them, so far as it affected the Philadelphia, Wilmington & Baltimore Railroad, the corporation defendant, declared to be unconstitutional and invalid and the collection of the taxes enjoined.

The circuit court adjudged the tax imposed for the use of the rolling stock to be invalid and enjoined its enforcement, but sustained the legality of the other taxes, and a decree in conformity with this ruling was entered, from which both parties appealed to this Court. On the hearing in this Court, the state officers of Delaware withdrew their appeal, and the inquiry of the Court was thus limited to the validity of the Act of April, 1869, so far as it imposed the taxes specified in its first and fourth sections.

The invalidity of that act, so far as it imposed these taxes upon the defendant corporation, was asserted upon the following grounds:

1st. That it violated the contract between the State of Delaware and the company contained in the charter of the latter.

2d. That it imposed taxes upon property beyond the jurisdiction of the state.

3d. That it conflicted with the power of Congress to regulate commerce among the several states; and,

4th. That it interfered with the right of transit for persons and property from one state into or through another.

Page 85 U. S. 212

The defendant corporation, as already mentioned, was formed by union with companies chartered by other states, and to understand fully the positions of the appellant, reference must be had to the original corporations and the legislation by which they were created. By an act of the Legislature of Maryland passed in 1831 and its supplement, a corporation called the Delaware & Maryland Railroad Company was created, with authority to construct and maintain a railroad from a point on the Delaware & Maryland line to some point on the Susquehanna River, and by the nineteenth section of the act it was provided that the shares of the capital stock of the company should be exempt from the imposition of any tax or burden by the state's assenting to the act, except upon that portion of the permanent and fixed works of the company, which might be within the State of Maryland. By an act of the Legislature of Delaware passed in 1832 and its supplement, another corporation was created called the Wilmington & Susquehanna Railroad Company, with authority to construct and maintain a railroad from a point on the boundary line of Pennsylvania and Delaware to the City of Wilmington and thence towards the Susquehanna in the direction of Baltimore to the Delaware & Maryland line. The act provided that the company should pay annually into the Treasury of the state a tax of eight percent on the dividends exceeding six percent of the capital stock actually paid in.

In 1835, these two companies were, under acts of the Legislatures of Maryland and Delaware, consolidated into one company under the name of the latter -- the Wilmington & Susquehanna Railroad Company. The act of Delaware authorizing the consolidation on her part provided that the holders of the stocks of the two companies should, when consolidated, hold, possess, and enjoy all the property, rights, and privileges, and exercise all the power granted to and vested in the companies or either of them by that law or any other law or laws of that state or of Maryland. The act of Maryland authorizing the consolidation on her part contained a similar provision. The act of Delaware at the same time repealed the provision

Page 85 U. S. 213

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Page 85 U. S. 214

in the charter of the original Wilmington & Susquehanna Railroad Company, requiring the payment of the tax of eight percent on the dividends exceeding six percent of the capital stock actually paid in, and provided that the consolidated company should pay annually into the treasury of the state, a tax of one-quarter of one percent on its capital stock of four hundred thousand dollars, the tax to be paid in semiannual installments, on the first of January and July of each year.

This consolidated company was in 1838 united with two other railroad companies, one called the Baltimore & Port Deposit Railroad Company, chartered by the Legislature of Maryland in 1831, with authority to construct and maintain a railroad from Baltimore to Port Deposit on the Susquehanna River and the other called the Philadelphia, Wilmington & Baltimore Railroad Company, chartered by the Legislature of Pennsylvania in the same year, with authority to construct and maintain a railroad from Philadelphia to the Delaware state line. These three companies were, under acts of the legislatures of these states, Delaware, Maryland, and Pennsylvania, consolidated into one company with a common stock, retaining as its corporate name the name of the company chartered by Pennsylvania. The act of the Legislature of Delaware, under which the consolidation was effected, declared that the respective companies should

"constitute one company, and be entitled to all the rights, privileges, and immunities which each and all of them possess, have, and enjoy, under and by virtue of their respective charters."

Previous to the consolidation, the three companies had constructed and were operating their respective railroads, which together formed a connected line of railroad from Philadelphia to Baltimore via Wilmington, excepting the interval between the eastern terminus of the Baltimore & Port Deposit railroad, on the western bank of the Susquehanna, and the western terminus of the Wilmington & Susquehanna railroad, on the eastern bank of the same river, which interval was supplied by a ferry, but the line

Page 85 U. S. 215

was inferior in structure and equipment to that since maintained by the consolidated company.

Since the consolidation, the Philadelphia, Wilmington & Baltimore Railroad Company had built a bridge across the Susquehanna in the State of Maryland at a great expense, and had thus established and now maintains a continuous railroad route between Philadelphia and Baltimore, and had expended large sums in laying an additional main track, sidings and turnouts and in building depots and stations, and in furnishing an adequate equipment of rolling stock. The capital stock of the company when the bill was filed was represented by 186,088 fully paid shares of the par value of $50 each, of which 184,524 shares were held by persons who were neither citizens nor residents of Delaware.

The capital stock of the Maryland and Pennsylvania companies, previous to and at the time of the consolidation of these companies with the Delaware company, represented real and personal estate of great value (locally situated in these states) belonging to stockholders not domiciled in Delaware.

The entire length of the railroad of the consolidated Philadelphia, Wilmington & Baltimore Railroad Company, including a branch in the State of Maryland known as the Port Deposit Branch, is 97 74/100 miles, of which 23 8/10 miles are in the State of Delaware; but the value of the property of the company locally situated in the State of Delaware is much less than 2308/9974 of its entire property; the bridge across the Susquehanna, in the State of Maryland, representing alone an expenditure exceeding $1,500,000, and the value of the depot and station grounds, in the States of Pennsylvania and Maryland, with the buildings and structures thereon, exceeding 7666/9974 of the value of the entire depot and station property of the company.

Page 85 U. S. 224

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