The corporation tax is imposed upon the doing of corporate
business and with respect to the carrying on thereof, and not upon
the franchises or property of the corporation irrespective of their
use in business.
Flint v. Stone Tracy Co., 220 U.
S. 107,
220 U. S.
145.
A railway corporation which has leased its railroad to another
company operating it exclusively, but which maintains its corporate
existence and collects and distributes to its stockholders the
rental from the lessee and also dividends from investments, is not
doing business within the meaning of the Corporation Tax Act.
Park Realty Company case sub Flint v. Stone Tracy Co.,
220 U. S. 171,
distinguished, and
Zonne v. Minneapolis Syndicate,
220 U. S. 187,
followed.
Quaere whether such a corporation would be subject to
the tax if it exercised the power of eminent domain or other
corporate powers for the benefit of the lessee.
192 F. 670 affirmed.
The facts, which involve the construction of the provisions of
the Corporation Tax Act as to what constitutes doing business by a
corporation so as to subject it to the tax, are stated in the
opinion.
Page 228 U. S. 297
MR. JUSTICE PITNEY delivered the opinion of the Court.
The Minehill & Schuylkill Haven Railroad Company, the
respondent herein (called for convenience the Minehill Company),
sued the petitioner, who is Collector of Internal Revenue at
Philadelphia, to recover certain taxes for the years 1909 and 1910,
paid under protest by that company under the Corporation Tax Act of
1909. The United States circuit court held that the company was not
"engaged in business" within the meaning of the act, and that
therefore the taxes had been illegally assessed, and rendered
judgment for their recovery. 192 F. 670. The circuit court of
appeals affirmed the judgment, and the case comes here upon
certiorari.
The facts appear from the plaintiff's statement of claim and the
defendant's affidavit of defense, which latter was overruled as
insufficient. They may be summarized as follows: the Minehill
Company was incorporated by an act of the Legislature of the State
of Pennsylvania, approved March 24, 1828 (P.L. p. 205), for the
purpose of constructing and operating a railroad, with appropriate
powers, including the power of eminent domain. Under this charter,
a railroad was built and for many years operated. Under the
authority of general acts of the legislature, approved respectively
April 23, 1861 (P.L. p. 410), and February 17, 1870 (P.L. p. 31),
the Minehill Company, in the year 1896, leased its entire railroad,
with all side tracks, extensions, and appurtenances of every kind,
and all rolling stock and personal property of every description,
in use or adapted for use in, upon, or about the railroad
(excepting some property intended to have been described in a
schedule annexed to the lease, but which is not described, no such
schedule having been annexed), and also
"All the rights, powers, franchises (other than the franchise of
being a corporation), and privileges which may now or at any
time
Page 228 U. S. 298
hereafter during the time hereby demised be lawfully exercised
or enjoyed in or about the use, management, maintenance, renewal,
extension, alteration, or improvement of the demised premises, or
any of them,"
unto the Philadelphia & Reading Railway Company for a term
of nine hundred and ninety-nine years from January 1, 1897 at a
yearly rental of $252,612, that being equivalent to six percentum
upon the capital stock of the Minehill Company.
The lessee agreed to keep the road in good order and repair,
keep it in public use and efficiently operate it, and return it to
the lessor company at the expiration or other determination of the
lease. The Minehill Company agreed during the term of the lease to
maintain its corporate existence and organization, and that, when
requested by the lessee, it would
"put in force and exercise each and every corporate power, and
do each and every corporate act, which the Minehill Company might
now, or at any time hereafter, lawfully put in force or exercise,
to enable the railway company (the lessee) to enjoy, avail itself
of, and exercise, every right, franchise, and privilege in respect
of the use, management, maintenance, renewal, extension, etc., of
the property demised, and of the business to be there carried
on."
It was provided that, upon default in the payment of the rent
reserved, or in the performance of certain other covenants, the
lessor might declare the lease forfeited, and reenter and repossess
the demised premises. The lease further provided that the lessee
might, under certain circumstances, abandon certain railway
lines
"whenever it shall be found legally practicable to abandon so
much of the said lines of railroad, without working a forfeiture or
any impairment of the chartered rights and franchises of the
Minehill Company as to its railroads, or any part thereof, or
without creating any liability on the part of the Minehill Company
or the railway company, to the public or the commonwealth, for
Page 228 U. S. 299
the nonuser of such portions of the railroad lines."
In the event thus provided for, the abandoned rails, machinery,
etc., are to be sold, and the proceeds turned over to the Minehill
Company, and the annual rental proportionately reduced.
Pursuant to this lease, the entire railroad and all property
connected therewith was turned over to the Reading Company, and
since then has been operated by that company, and the Minehill
Company has not carried on any business in connection with the
operation of it. It has, however, maintained its corporate
existence and organization by the annual election of a president
and board of managers, and this board has annually elected a
secretary and treasurer. It receives annually from the Reading
Company the fixed rental called for by the lease, and it receives
annually sums of money as interest on its bank deposits, and also
maintains a "contingent fund," from which it receives annual sums
as interest or dividends. And it annually pays the ordinary and
necessary expenses of maintaining its office and keeping up the
activities of its corporate existence, including the payment of
salaries to its officers and clerks. It keeps and maintains at its
offices stock books for the transfer of its capital stock, and this
stock is bought and sold upon the market. The annual income from
the contingent fund appears to be about $24,000, its annual
payments for state taxes about as much, and its expenditures for
corporate maintenance about $5,000.
The Corporation Tax Law (Act of August 5, 1909, § 38, 36 Stat.
c. 6, pp. 11, 112-117) provides:
"That every corporation . . . organized for profit and having a
capital stock represented by shares . . . and engaged in business
in any state . . . shall be subject to pay annually a special
excise tax with respect to the carrying on or doing business by
such corporation . . . equivalent to one percentum upon the
Page 228 U. S. 300
entire net income over and above $5,000 received by it from all
sources during such year, exclusive of amounts received by it as
dividends upon stock of other corporations . . . subject to the tax
hereby imposed. . . ."
"Such net income shall be ascertained by deducting from the
gross amount of the income of such corporation, . . . received
within the year from all sources: (first) all the ordinary and
necessary expenses actually paid within the year out of income in
the maintenance and operation of its business and properties,
including all charges such as rentals or franchise payments,
required to be made as a condition to the continued use or
possession of property; (second) all losses actually sustained
within the year and not compensated by insurance or otherwise,
including a reasonable allowance for depreciation of property. . .
."
In
Flint v. Stone Tracy Co., 220 U.
S. 107, the question of the constitutionality of this
act was presented here for decision. Upon the preliminary question
of interpretation, the Court said (p.
220 U. S.
145):
"It is therefore apparent, giving all the words of the statute
effect, that the tax is imposed not upon the franchises of the
corporation irrespective of their use in business, nor upon the
property of the corporation, but upon the doing of corporate or
insurance business, and with respect to the carrying on thereof, in
a sum equivalent to one percentum upon the entire net income over
and above $5,000 received from all sources during the year -- that
is, when imposed in this manner, it is a tax upon the doing of
business with the advantages which inhere in the peculiarities of
corporate or joint stock organizations of the character described.
As the latter organizations share many benefits of corporate
organization, it may be described generally as a tax upon the doing
of business in a corporate capacity. . . . The income is not
limited
Page 228 U. S. 301
to such as is received from property used in the business,
strictly speaking, but is expressly declared to be upon the entire
net income above $5,000, from all sources, excluding the amounts
received as dividends on stock in other corporations, joint stock
companies or associations, or insurance companies also subject to
the tax. In other words, the tax is imposed upon the doing of
business of the character described, and the measure of the tax is
to be the income, with the deduction stated, received not only from
property used in business, but from every source."
In discussing the constitutional question, reference was first
made to the case of
Pollock v. Farmers' Loan & Trust
Co., 157 U. S. 429,
158 U. S. 158 U.S.
601, which held the income tax provisions of the Act of August 27,
1894 (28 Stat. c. 349, pp. 509, 553, §§ 27, etc.), to be
unconstitutional because amounting to a direct tax within the
meaning of the Constitution, and because not apportioned according
to population, as required by that instrument. Attention was called
(220 U.S.
220 U. S. 148)
to the expressions used by Mr. Chief Justice Fuller, speaking for
the Court in the
Pollock case, upon the rehearing, as to
the distinction between a tax upon the income derived from real
estate and from invested personal property, on the one hand, and an
excise tax upon business privileges, employments, and vocations,
upon the other. Reference was also made to the interpretation put
upon the decision in the
Pollock case in
Knowlton v.
Moore, 178 U. S. 41,
178 U. S. 80,
and in
Spreckels Sugar Refining Co. v. McClain,
192 U. S. 397, and
it was held that the Corporation Tax Law of 1909
"does not impose direct taxation upon property solely because of
its ownership, but the tax is within the class which Congress is
authorized to lay and collect under Art. I, § 8, cl. 1 of the
Constitution, and described generally as taxes, duties, imposts,
and excises, upon which the limitation is that they shall be
uniform throughout the United States. "
Page 228 U. S. 302
In applying this principle to the several cases then
sub
judice, in some of which the validity of the tax was
challenged by the stockholders of certain real estate companies
whose business was principally the holding and management of real
estate, the Court dealt, among others (220 U.S.
220 U. S.
170), with the Park Realty Company, organized to
"work, develop, sell, convey, mortgage, or otherwise dispose of
real estate; to lease, exchange, hire, or otherwise acquire
property; to erect, alter, or improve buildings; to conduct,
operate, manage, or lease hotels, apartment houses, etc.; to make
and carry out contracts in the manner specified concerning
buildings . . . and generally to deal in, sell, lease, exchange, or
otherwise deal with lands, buildings, and other property, real or
personal,"
etc. At the time the bill was filed in that case, the business
of the Park Realty Company related only to the management and
leasing of one hotel. Others of the realty companies that were
before the Court were engaged in more extensive business
transactions. The Court held (p.
220 U. S.
171):
"We think it clear that corporations organized for the purpose
of doing business, and actually engaged in such activities as
leasing property, collecting rents, managing office buildings,
making investments of profits, or leasing ore lands and collecting
royalties, managing wharves, dividing profits, and in some cases
investing the surplus, are engaged in business within the meaning
of this statute, and in the capacity necessary to make such
organizations subject to the law."
Another case argued and decided at the same time, but separately
reported, is
Zonne v. Minneapolis Syndicate, 220 U.
S. 187. In this case, the Court held that the
corporation was not doing business in such wise as to make it
subject to the tax imposed by the Act of 1909 because, while
originally organized for and engaged in the business of letting
stores and offices in a building owned by it, and collecting and
receiving rents therefor, it had afterwards
Page 228 U. S. 303
made a lease of all lands belonging to it to certain trustees
for a term of 130 years, and then had caused its articles of
incorporation, which had been those of a corporation organized for
profit, to be so amended as to confine the purpose of the
corporation to the ownership of the lands in question, subject to
the lease, and
"for the convenience of its stockholders to receive, and to
distribute among them, from time to time, the rentals that accrue,
under said lease, and the proceeds of any disposition of said
land."
The Court said (p.
220 U. S.
190):
"The corporation involved in the present case, as originally
organized, and owning and renting an office building, was doing
business within the meaning of the statute as we have construed it.
Upon the record now presented, we are of opinion that the
Minneapolis Syndicate, after the demise of the property and
reorganization of the corporation, was not engaged in doing
business within the meaning of the act. It had wholly parted with
control and management of the property; its sole authority was to
hold the title subject to the lease for 130 years, to receive and
distribute the rentals which might accrue under the terms of the
lease, or the proceeds of any sale of the land, if it should be
sold. The corporation had practically gone out of business in
connection with the property, and had disqualified itself by the
terms of reorganization from any activity in respect to it."
The precise question presented by the present record is whether
the Minehill Company is "doing business" in the sense in which the
realty companies concerned in
Flint v. Stone Tracy Co.,
220 U. S. 107,
220 U. S. 170,
were doing business, or had gone out of business in substantially
the same sense that the Minneapolis Syndicate had done so.
From the facts as stated above, it is entirely clear that the
Minehill Company was not, during the years of 1909 and 1910,
engaged at all in the business of maintaining or operating a
railroad, which was the prime object of its
Page 228 U. S. 304
incorporation. This business, by the lease of 1896, it had
turned over to the Reading Company. If that lease had been made
without authorization of law, it may be that, for some purposes,
and possibly for the present purpose, the lessee might be deemed in
law the agent of the lessor, or at least, the lessor held estopped
to deny such agency. But the lease was made by the express
authority of the state that created the Minehill Company, conferred
upon it its franchise, and imposed upon it the correlative public
duties. The effect of this legislation and of the lease made
thereunder was to constitute the Reading Company the public agent
for the operation of the railroad, and to prevent the Minehill
Company from carrying on business in respect of the maintenance and
operation of the railroad so long as the lease shall continue. And
it is the Reading Company, and not the Minehill Company, that is
"doing business" as a railroad company upon the lines covered by
the lease, and is taxable because of it. The Corporation Tax Law
does not contemplate double taxation in respect of the same
business.
The government points out that, by the terms of the act, the
Reading Company is allowed to deduct from its gross income the
$252,612 paid annually to the Minehill Company for rentals under
the lease, with the result that, unless the latter company is held
to be "doing business" as a railroad company, both lessor and
lessee entirely escape from taxation on $252,612 of income. But an
examination of the act shows that this is the precise result
intended by Congress.
"Net income shall be ascertained by deducting from the gross
amount of the income . . . (first) all the ordinary and necessary
expenses actually paid within the year out of income in the
maintenance and operation of its business and properties,
including all charges, such as rentals or franchise
payments, required to be made as a condition to the continued
use or possession of property."
The deduction of rentals is not confined
Page 228 U. S. 305
to such as are paid to companies that are subject to the tax
imposed by the act, and yet the suggestion that it might be so
confined was present in the mind of the draftsman, for below there
is a provision for deducting "(fifth) all amounts received . . . as
dividends upon stock of other corporations . . .
subject to the
tax hereby imposed." In short, Congress said, and intended to
say, as to rentals paid for the use or possession of property and
franchises employed by the lessee company in a business taxable
under the act, let there be a deduction by the lessee of the amount
of such rentals whether the lessor is within the reach of the
taxing scheme or not.
We conclude that the Minehill Company was not taxable with
respect to the railroad business.
It should be mentioned that there is nothing in the record to
show that, during the taxing years in question, the company
exercised its power of eminent domain, or put in force any other
special corporate power, in aid of the business of the lessee. We
therefore do not pass upon the question whether, if it should do
so, it would be taxable under the act in question. We cannot,
however, agree with the contention made in behalf of the
government, that, because the Minehill Company retains its
franchise of corporate existence, maintains its organization, and
holds itself ready to exercise its franchise of eminent domain, or
other reserved powers, if and when required by the lessee, and
ready to resume possession of the property at the expiration of the
lease, it is therefore to be treated as doing business, in respect
of the railroad within the meaning of the Corporation Tax Law. As
to these matters, the case is governed by what was said by the
court in
Flint v. Stone Tracy Co., 220
U. S. 145:
"It is therefore apparent, giving all the words of the statute
effect, that the tax is imposed not upon the franchises of the
corporation, irrespective of their use in business, nor upon the
property of the corporation, but upon the doing of corporate or
Page 228 U. S. 306
insurance business, and with respect to the carrying on
thereof."
And again, p.
220 U. S.
150
"The tax is not payable unless there be a carrying on or doing
of business in the designated capacity, and this is made the
occasion for the tax, measured by the standard prescribed."
There remains to be considered the fact that the Minehill
Company has a considerable amount of personal assets known as its
"contingent fund," in the form of investments (the amount and
particulars are not specified), from which it derives an annual
income of about $24,000; that it keeps a deposit in bank, receives
and collects interest upon such deposit, and distributes the income
thus received, as well as the rentals received from the Reading
Company (after payment of expenses and taxes) to its stockholders
in the form of dividends.
In our opinion, the mere receipt of income from the property
leased (the property being used in business by the lessee, and not
by the lessor) and the receipt of interest and dividends from
invested funds, bank balances, and the like, and the distribution
thereof among the stockholders of the Minehill Company, amount to
no more than receiving the ordinary fruits that arise from the
ownership of property. The ground of the decision in the
Pollock case was that a tax upon income received from real
estate and invested personal property (as distinguished from income
received from the transaction of business) was in effect a direct
tax upon the property itself, and therefore invalid unless
apportioned according to population. In the
Flint case, in
sustaining the Act of 1909 as a tax upon the privilege of doing
business in corporate from, against the objection that it includes
within its reach the income of real estate and personal property
not used in the business and not the subject of taxation, the court
said (220 U.S.
220 U. S.
163):
"The measure of such tax may be the income from the property of
the corporation, although a part of such income is derived from
property, in itself, nontaxable.
Page 228 U. S. 307
And again, after referring to previous decisions (220 U.S.
220 U. S. 165):"
"It is therefore well settled by the decisions of this Court
that, when the sovereign authority has exercised the right to tax a
legitimate subject of taxation as an exercise of a franchise or
privilege, it is no objection that the measure of taxation is found
in the income produced in part from property which, of itself
considered, is nontaxable. Applying that doctrine to this case, the
measure of taxation being the income of the corporation from all
sources, as that is but the measure of a privilege tax within the
lawful authority of Congress to impose, it is no valid objection
that this measure includes, in part at least, property which, as
such, could not be directly taxed. . . . The tax must be measured
by some standard, and none can be chosen which will operate with
absolute justice and equality upon all corporations. Some
corporations do a large business upon a small amount of capital;
others with a small business may have a large capital. A tax upon
the amount of business done might operate as unequally as a measure
of excise as it is alleged the measure of income from all sources
does. Nor can it be justly said that investments have no real
relation to the business transacted by a corporation. The
possession of large assets is a business advantage of great value;
it may give credit which will result in more economical business
methods; it may give a standing which shall facilitate purchases;
it may enable the corporation to enlarge the field of its
activities and in many ways give it business standing and
prestige."
In short, the inclusion of income derived from property in
arriving at the measure of the tax to be imposed with respect to
the doing of corporate business was sustained largely because the
property not used in the business, and the income from such
property, have a fair relation to the business itself, and may
contribute materially to its proper and economical conduct. But
that reasoning furnishes
Page 228 U. S. 308
no support for the contention that the mere receipt of income
from property, and the payment of organization and administration
expenses incidental to the receipt and distribution thereof,
constitute such a business as is taxable within the meaning of the
Act of 1909. The distinction is between (a) the receipt of income
from outside property or investments by a company that is otherwise
engaged in business, in which event the investment income may be
added to the business income in order to arrive at the measure of
the tax, and (b) the receipt of income from property or investments
by a company that is not engaged in business except the business of
owning the property, maintaining the investments, collecting the
income, and dividing it among its stockholders. In the former case,
the tax is payable; in the latter not.
And so, upon the whole, we think the court below correctly held
that the present case is governed by
Zonne v. Minneapolis
Syndicate, 220 U. S. 187, and
that the taxes under consideration were unlawfully imposed.
Judgment affirmed.
MR. JUSTICE Day, dissenting:
I am unable to concur in the opinion of the majority of the
Court. It seems to me that, applying the principles laid down in
the
Corporation Tax Cases, 220 U.
S. 107, the Minehill & Schuylkill Haven Railroad
Company is a corporation doing business within the meaning of the
law, and subject to the tax.
We are advised by a brief filed by an
amicus curiae
that the decision in this case will affect a number of cases now
pending, and, owing to its importance as affecting the public
revenue, I feel justified in briefly stating the grounds of my
dissent.
The corporation tax is imposed under the terms of the
Page 228 U. S. 309
law upon every corporation organized for profit, having a
capital stock represented by shares, and engaged in business in any
state. Every such corporation is subject to a special excise tax
with respect to the carrying on or doing of business, equivalent to
one percent upon the entire net income over and above $5,000,
received by it from all sources during the taxing year. This tax,
it was held in 220 U.S., was constitutionally imposed, and rests
upon the doing of business with the advantages which inhere in the
peculiarities of corporate or joint stock organization. As was said
in that case, doing business is a very comprehensive term,
embracing about everything in which a person can be employed, and
the definition of business as "that which occupies the time,
attention, and labor of men for the purpose of a livelihood or
profit" was adopted and approved. As is said in the majority
opinion, the precise question in this case is, was the Minehill
Company doing business in the sense in which the term is employed
in the law, or had it gone out of business in such substantial
sense that it was no longer subject to the law?
I do not care to restate the facts, which are developed fully in
the majority opinion. It therein appears that the Minehill Company,
while it has leased its railroad for a term of years, still
maintains corporate organization, keeps an office and an office
force, and collects the rentals from the lessee company, and
distributes the sums among its shareholders. It has also agreed to
keep up its corporate organization, and, if necessary, to use its
corporate powers for the benefit of the lessee. And its activities
do not stop here. The affidavit in defense, filed by the collector,
which I understand the Pennsylvania practice takes as true, shows
that the company receives annually sums of money as interest on
deposits, and maintains a contingent fund from which it also
receives annual sums as dividends. The return discloses that the
amount of dividends received
Page 228 U. S. 310
for the year ending December 31, 1909, as interest on deposits,
and from its contingent fund, was $24,471.07. The nature and amount
of the investments are not specified in the record, but they must
be very considerable in view of the annual income derived.
We are therefore brought to the direct question, is a live
corporation which, though it has leased its railroad property for a
term of years, maintains and has agreed to maintain its corporate
organization, collects and distributes an annual rental of
$252,612, keeps and maintains an office and an office force at
large expense, deposits money upon interest, and receives and
distributes the earnings thereof, invests a large fund which,
together with interest on deposits, yields over $24,000 a year,
doing business within the meaning of the corporation tax act? The
amount of business done is utterly immaterial. The doing of any
business with the advantages which inhere in corporate organization
brings the corporation within the terms of the act. Such was the
ruling in the
Flint case, after full consideration by this
Court of the terms and scope of the law.
It is said, however, that this case is controlled by the ruling
in the
Zonne case, which was decided at the same time as
the
Flint case
220 U. S. 220 U.S.
187. It seems to me that the present case is quite unlike that one.
There, the corporation, which owned a piece of real estate, had
leased it for a term of 130 years at an annual rental of $61,000,
and had at the same time amended its corporate organization so as
to limit its powers to the sole purpose of holding the title to the
lands leased, and of receiving and distributing among its
stockholders the rentals that accrued under the lease, and the
proceeds from any disposition of the land. This was the whole
extent of its activity, and the amounts derived therefrom
represented its entire income. In that case, the Court held that
the corporation had practically gone out of business, and had
disqualified
Page 228 U. S. 311
itself from any activity in respect thereof, and therefore did
not come within the scope of the act.
In the present case, the corporation has not disqualified itself
from business activity. It maintains a considerable force in active
employment, and, entirely apart from the receipts from the railroad
lease, so deposits and invests its funds as to create, in these
days of low interest upon good investments, an annual income of
over $24,000, as appears by its return. The amount derived from
investments depends upon the exercise of judgment and the
efficiency of management. If business includes everything that
occupies the time, attention, and labor of men for profit, it seems
to me that these facts show that the Minehill Company is carrying
on business in the present instance.
I am unable to agree that a corporation whose officers and
agents are engaged in its behalf in selecting banks in which to
deposit large sums of money, in passing upon and choosing
securities in which corporate funds are to be invested, and then in
distributing the interest and profits accruing therefrom among its
stockholders, is not engaged in doing business in the sense that
the corporation in the
Zonne case was not.
I think the present case is much nearer the ruling made by this
Court in the
Corporation Tax Cases in the matter of the
realty companies therein involved. Take, for instance, the Park
Realty Company. That corporation was organized to work, develop,
sell, and convey real estate; to lease, exchange, hire, or
otherwise acquire property; to erect, alter, or improve buildings;
to conduct, operate, manage, or lease hotels, etc. It appeared
that, at the time of the imposition of the tax, the sole business
or property owned by the Realty Company was the Hotel Leonori. It
was leased for twenty-one years at an annual rental of $55,000. The
corporation was engaged in no business except the management and
lease of that hotel property,
Page 228 U. S. 312
and was in receipt of no other income than that derived from its
rental, and had no assets other than that property and the income
thereof. It was held to be doing business within the meaning of the
act. The Minehill Company, it seems to me, is doing more and a
greater variety of business than was attributed to the Park Realty
Company as the basis of the assessment upon it. Others of the
realty companies held taxable in the
Corporation Tax
Cases, it seems to me, were engaged in as little business
activity as is the corporation herein involved.
With deference to the majority opinion, I think the Minehill
Company, upon the facts here adduced, is engaged in business, and
ought to be held liable to the tax.
MR. JUSTICE HUGHES and MR. JUSTICE LAMAR concur in this
dissent.