Where a railroad company is reorganized under a special act of
the legislature but no new corporation is chartered, a statutory
exemption from taxation is not destroyed. A state may, through its
legislature, make a valid contract as to taxation with a
corporation which the latter can enforce, and this Court is not,
under the rule generally applicable as to the binding effect of
decisions of the supreme court of the state construing its
statutes, concluded by
Page 201 U. S. 544
the decisions of that court as to whether such a contract
exists, the extent of its terms, and whether any subsequent law has
impaired its obligation. But where the supreme court of the state
sustains the validity of the statute from which a contract is
claimed, this Court follows that decision and determines what the
contract is.
Provisions in a state statute for a special rate of taxation in
respect to a particular corporation, made with a view of inducing
large expenditures and the completion of an unfinished road of
great public importance, and which are formally accepted and
complied with, amount to a contract within the protection of the
impairment clause of the federal Constitution, and no other tax can
be imposed on the corporation.
An annual tax of one percent imposed by a special statute on the
capital stock of a particular corporation to be paid in lieu of all
other taxes except for penalties imposed thereupon and prescribed
to be estimated each year on the last annual report of the
corporation,
held, under the circumstances of this case,
to be a tax upon the property of the corporation, and not a tax
upon the shares of stock held by the stockholders.
This case, which is a suit brought by the appellee in the
Circuit Court of the United States for the Western District of
Michigan, while involving the validity of the railroad tax law of
the State of Michigan, Acts 1901, c. 173, p. 236, recently
considered by this Court (
ante p.
201 U. S. 459)
involves the further question of the existence and scope of an
alleged contract in respect to taxation. The Detroit and Pontiac
Railroad Company was chartered by the Legislature of the Territory
of Michigan, March 7, 1834, the Oakland and Ottawa Railroad Company
by the Legislature of the State of Michigan, April 3, 1848, Laws
1848, p. 351. By an Act of February 13, 1855, Laws of 1855, p. 305,
the Detroit and Pontiac Railroad was authorized to change its name
to the Detroit and Milwaukee Railway Company, to purchase all the
rights, property, and franchises of the Oakland and Ottawa Railroad
Company for the building and operating a continuous line of road
from Detroit to Lake Michigan, and the purchase and sale thus
provided for was duly effected. Section 9 of this act provided that
--
"the said company shall, on or before the first day of July, pay
the state treasurer an annual tax of one percent on the capital
stock of said company paid in, which tax shall be in lieu of all
other taxes, except for penalties imposed upon said company
Page 201 U. S. 545
by its act of incorporation, or any other law of this state. The
said tax shall be estimated upon the last annual report of said
corporation."
Since 1850, the state constitution has contained these
provisions:
"Corporations may be formed under general laws, but shall not be
created by special act except for municipal purposes. All laws
passed pursuant to this section may be amended, altered, or
repealed. But the legislature may, by a vote of two-thirds of the
members elected to each house, create a single bank with
branches."
Section 1, Art. XV.
"The legislature shall pass no law altering or amending any act
of incorporation heretofore granted without the assent of
two-thirds of the members elected to each house, nor shall any such
act be renewed or extended. This restriction shall not apply to
municipal corporations."
Section 8, Art. XV.
In 1860, certain mortgages on the road were foreclosed and the
company reorganized, and again in 1878 the road with its
appurtenances and franchises was sold upon mortgage foreclosure and
again reorganized as the Detroit, Grand Haven and Milwaukee Railway
Company. These foreclosures and reorganization took place under the
authority of Act No. 96, Laws of 1859, p. 52.
On the hearing in the circuit court it, was held that section 9,
above quoted, created a contract between the state and the company
which prevented the enforcement against it of the railroad tax law,
and a decree was entered accordingly, 138 F. 264, from which decree
the state auditor appealed directly to this Court.
Page 201 U. S. 555
MR. JUSTICE BREWER delivered the opinion of the Court:
Many questions which might otherwise be perplexing are settled
by the decision of the Supreme Court of Michigan in
Attorney
General v. Joy, 55 Mich. 94. That was an information brought
by the Attorney General in the supreme court of the state, charging
the defendants with claiming and usurping the corporate rights and
franchises of the Detroit, Grand Haven and Milwaukee Railway
Company. The act of 1855 was sustained, notwithstanding some
alleged defects in its passage, and it was decided that it did not
create a new corporation, but simply authorized the old territorial
corporation, the Detroit and Pontiac Railroad Company, to change
its name and extend its line of road, and, further, that this act
in no respect conflicted with sections 1 and 8, Article XV, of the
state constitution. The court also sustained the act of 1859, under
which the foreclosures took place, and held that by them no new
company was chartered, that there was simply a reorganization and
continuance of the old company.
The latter act provides that, upon certain conditions, new stock
shall be issued in lieu of the old stock, the old officers of the
company superseded,
"and the new stockholders and officers shall, in the law, be
deemed and taken to be the stockholders and offers of said
corporation, the charter and all laws appertaining thereto
continuing to be the charter and laws regulating and governing said
corporation, except that it may be known and called, and sue and be
sued, and may contract and do all acts which in the law it could
have done in its old name, in and by the name set forth in the
declaration aforesaid."
P. 253.
The testimony in this case shows compliance with these
conditions. Compliance was also shown in
Cook v. Detroit, Grand
Haven & Milwaukee Railway Company, 43 Mich. 349, and in
that case the validity of the new organization as a continuance of
the old corporation was recognized.
Page 201 U. S. 556
We thus come to the question of the effect of section 9 of the
act of 1855. It has been often decided by this Court, so often that
a citation of authorities is unnecessary, that the legislature of a
state may, in the absence of special restrictions in its
Constitution, make a valid contract with a corporation in respect
to taxation, and that such contract can be enforced against the
state at the instance of the corporation. It is said that we are
not concluded by a decision of the supreme court of a state in
reference to the matter of contract; that, while the rule is to
accept the construction placed by that court upon its statutes, an
exception is made in case of contracts, and that we exercise an
independent judgment upon the question whether a contract was made,
what its scope and terms are, and also whether there has been any
law passed impairing its obligation.
Douglas v. Kentucky,
168 U. S. 488. It
is in order to uphold the provision of the federal Constitution
that no state shall pass a law impairing the obligation of a
contract that this duty of independent judgment is cast upon this
Court. But here the supreme court of the state has ruled in favor
of the continued existence of a corporation and the applicability
of certain statutes, and when, upon the face of such statutes, a
valid contract appears, we accept the ruling that the statutes are
valid and applicable enactments. In other words, the supreme court
of the state having sustained the validity of a statute from which
a contract is claimed, this Court follows that decision, and starts
with the question, what contract is shown by statute?
The particular section which it is claimed creates the contract
(section 9 of the act of 1855) provides that the company shall pay
an
"annual tax of one percent on the capital stock of said company
paid in, which tax shall be in lieu of all other taxes, except for
penalties imposed upon said company by its act of incorporation, or
any other law of this state."
It is contended in the first place that this is a mere gratuity,
which can be withdrawn at any time -- a statute in respect to
taxation subject to change like other revenue statutes, and
Wisconsin
Page 201 U. S. 557
& Michigan Railway Company v. Powers, 191 U.
S. 379, is cited as authority. But the difference
between that case and this is obvious. That arose on a general law
in respect to taxation, this on a provision in a special act having
reference to a particular corporation -- an act which called for
and received acceptance by the corporation. It was in the opinion
in that case (p.
191 U. S.
385):
"A distinction between an exemption from taxation contained in a
special charter and general encouragement to all persons to engage
in a certain class of enterprise is pointed out in
East Saginaw
Manufacturing Company v. East Saginaw, 13 Wall.
373. In earlier and later cases, it was mentioned that there was no
counter-obligation, service, or detriment incurred, that properly
could be regarded as a consideration for the supposed contract.
Christ
Church v. Philadelphia County, 24 How. 300;
Tucker
v. Ferguson, 22 Wall. 527;
Grand Lodge &c.
of Louisiana v. New Orleans, 166 U. S. 143. . . . The
presence or absence of consideration is an aid to construction in
doubtful cases -- a circumstance to take into account in
determining whether the state has purported to bind itself
irrevocably or merely has used words of prophecy, encouragement, or
bounty, holding out a hope, but not amounting to a covenant."
That there was ample consideration for a contract in this case,
if consideration be necessary, is shown by the opinion of the
supreme court in
Attorney General v. Joy, supra, when it
says (p. 101):
"The act of 1855 was not promoted exclusively in the interest of
the railroad companies named in it, but the state itself was
largely concerned, and expected to accomplish important public
purposes by means of it. Twenty years before that time, the state
had planned for the construction of several parallel lines of
railroad across the state from east to west, one of which was to be
north of the line of the Michigan Central Railroad, and was
expected to be of very high value, not only
Page 201 U. S. 558
to all that part of the state through which it would run, but to
the whole state. Much disappointment had come from the road's not
being constructed, and when the Detroit and Pontiac Railroad
Company, which already had near thirty miles of road in successful
operation and could command means for the construction of more,
proposed, on certain terms which were expressed in the act of 1855,
to purchase the rights and franchises of the Oakland and Ottawa
Company, and to extend their own road to Lake Michigan, there is no
reason for doubting that the people of the state at large looked
upon this as a favorable opportunity for accomplishing a desire
which twenty years before had found expression in the legislation
of the state, and which ever since had been kept constantly in
view."
"
* * * *"
"It has already been seen that the important public purpose
which the state had in view in assenting to the act of 1855 has
been accomplished; the railroad from Pontiac to Lake Michigan has
been constructed and for many years operated, and the state has
reaped the benefits. But, in order to accomplish this public
purpose, it seems to have become necessary to put the bonds and
shares of the Detroit and Milwaukee Railway Company upon the market
as well in Europe as in this country; the state recognized the
necessity, and by its legislation provided for facilitating sales.
The bonds and shares were sold to the amount of very many millions,
and every purchaser of one of them made the purchase in reliance
upon legislation of this state which appeared to sanction if not to
invite it."
P. 104.
See further 75 U. S.
Rouse, 8 Wall. 430,
75 U. S. 436,
in which we said:
"It is objected that there is no consideration stated in the act
for the release from taxation, which it is claimed is necessary in
order to uphold the contract. But this is a mistaken view of the
law on this subject."
"There is no necessity of looking for the consideration for
a
Page 201 U. S. 559
legislative contract outside of the objects for which the
corporation was created. These objects were deemed by the
legislature to be beneficial to the community, and this benefit
constitutes the consideration for the contract, and no other is
required to support it."
Surely no clearer case of contract can be presented than one in
which a legislature passes an act in respect to a particular
corporation making special provision concerning taxation, and does
so with a view of inducing large expenditures by the corporation
and the completion of an unfinished road whose completion is deemed
of great public importance, and where the special provision is, as
required, formally accepted, the expenditures made, and the road
completed.
It is suggested that this provision is not in terms made
perpetual. A sufficient answer to this is found in
Home of the
Friendless v. Rouse, supra, (p.
75 U. S.
437):
"Testing the contract in question by these rules, there does not
seem to be any rational doubt about its true meaning. 'All property
of said corporation shall be exempt from taxation' are the words
used in the act of incorporation, and there is no need of supplying
any words to ascertain the legislative intention. To add the word
'forever' after the word 'taxation' could not make the meaning any
clearer. It was undoubtedly the purpose of the legislature to grant
to the corporation a valuable franchise, and it is easy to see that
the franchise would be comparatively of little value if the
legislature, without taking direct action on the subject, could at
its will resume the power of taxation."
It is further contended that the contract provided in section 9
is one relating to the property of the shareholders, and not to
that of the corporation. The terms "share," "stock," "capital,"
"capital stock," are of frequent and not uniform use, and we have
often to turn to the context to see what is intended by their use
in a particular case. That a distinction exists between that which
is the property of the shareholder, and subject to taxation as
other property belonging
Page 201 U. S. 560
to them, and that which is the property of the collective
incorporated person we call a corporation, and subject to taxation
as such, has been repeatedly pointed out.
See Farrington v.
Tennessee, 95 U. S. 679;
Railroad Companies v. Gaines, 97 U. S.
697;
Railway Companies v. Loftin, 98 U. S.
559;
Bank of Commerce v. Tennessee,
104 U. S. 493;
Tennessee v. Whitworth, 117 U. S. 129;
Bank of Commerce v. Tennessee, 161 U.
S. 134;
Shelby County v. Union &c. Bank,
161 U. S. 149;
Central Railroad &c. Company v. Wright, 164 U.
S. 327;
New Orleans v. Citizens' Bank,
167 U. S. 371;
Owensboro National Bank v. Owensboro, 173 U.
S. 664;
Citizens' Bank v. Parker, 192 U. S.
73;
Delaware, L. &c. Railroad Company v.
Pennsylvania, 198 U. S. 341.
In the first of these cases, a bank's charter provided that the
company "shall pay to the state an annual tax of one-half of one
percent on each share of the capital stock subscribed, which shall
be in lieu of all other taxes," and it was held that that was a
contract in reference to the property of the shareholders, and
prevented further taxation upon their separate property. In the
opinion it was said (pp.
95 U. S.
686-687):
"The capital stock and the shares of the capital stock are
distinct things. The capital stock is the money paid or authorized
or required to be paid in as the basis of the business of the bank,
and the means of conducting its operations. . . . The capital stock
and the shares may both be taxed, and it is not double
taxation."
In the second is this ruling (p.
97 U. S.
707):
"In general, an exemption of capital stock, without more, may
with great propriety be considered, under ordinary circumstances,
as exempting that which, in the legitimate operations of the
corporation, comes to represent the capital."
And in
Tennessee v. Whitworth, 117
U. S. 136, this description of separable elements of
value was given:
"In corporations, four elements of taxable value are sometimes
found: 1, franchises; 2, capital stock in the hands of the
corporation; 3, corporate property; and 4, shares of the capital
stock in the hands of the individual stockholders. Each
Page 201 U. S. 561
of these is, under some circumstances, an appropriate subject of
taxation."
In several of the cases, attention is called to the qualifying
words which show an intent on the part of the legislature of
something other than that generally embraced within the term
"capital stock." But it is unnecessary to review these cases in
detail.
By section 9, the tax is "on the capital stock of said company
paid in." Clearly that refers to the property which the corporation
has received and presumably holds. It is not the individual
property of the shareholders which is contemplated, but that which
is in the treasury of the corporation, or included among its
assets. This, as we have seen from the quotations, is the ordinary
meaning of the term "capital stock." Further, we find that this tax
is to be "in lieu of all other taxes, except for penalties imposed
upon said company." In other words, the tax upon the company of one
percent may be increased by any penalties imposed upon the company,
and in no other way. Again, the tax is to "be estimated upon the
last annual report of said corporation." While such report might be
expected to include not merely the property belonging to the
corporation, but also the number and names of the stockholders and
the number of shares held by each, and possibly also the amount
paid in by each, yet the word "estimated" carries with it the idea
of valuation, rather than of mathematical apportionment. It
apparently suggests that the property reported by the corporation
is to be the basis upon which the assessors shall make their
valuation, so that the tax is "estimated" upon that property,
rather than fixed by the mere process of multiplication or
division. That the tax is to be paid by the company is, of course,
not conclusive on the question, but it is in harmony with all the
other provisions of the section. Still further, we have the
practical construction placed by the authorities for a long series
of years, continued up to the year 1898. Under those circumstances,
we are of opinion that the tax provided for by section 9 is a tax
upon the property
Page 201 U. S. 562
of the corporation, and not a tax upon the shares of stock held
by the shareholders. There was therefore a contract between the
state and the corporation which prevented the subjection of the
property of the corporation to any other than the tax prescribed in
the statute.
The decree of the Circuit Court is
Affirmed
MR. JUSTICE WHITE dissented.