This Court will not presume that a state legislature in granting
a charter containing exemptions would either practice deceit or
make a futile grant.
A lessee of railroads which were built under special charters
containing irrepealable contracts by which the property was not
subject to be taxed higher than a specified percent on the annual
income derived therefrom is not subject to an ad valorem
tax as the owner of such property.
The statutes of Georgia in regard to the taxation of railroads
involved in this action are construed as making the fee exempt from
other taxation than that provided for in favor of the lessee as
well as of the lessor.
Page 236 U. S. 675
While technical distinctions should be avoided a far as may be
in matters of taxation in the interest of substantial justice, they
should not be disregarded in order to enable a state to escape from
a binding bargain, and so held
in regard to distinctions
between lessors and lessees where the protection of the latter is
necessary in order to make good the promise of the state made to
The courts cannot take the place of the taxing power, nor can
taxes based on ownership of the property be enforced against a
lessee of the property under the statutes of Georgia and the leases
involved in this case.
206 F. 107 affirmed.
The facts are stated in the opinion.
Page 236 U. S. 676
MR. JUSTICE HOLMES delivered the opinion of the Court.
This is a bill in equity, brought by the railway company, the
appellee, to prevent the collection of certain taxes which it is
alleged would be contrary to Article I, § 10, and to the Fourteenth
Amendment of the Constitution of the United States. The case was
heard on bill, demurrer, and answer, and certain agreed facts, and
the district court issued an injunction as prayed. 206 F. 107. The
facts, stripped of details not material to the question before us,
are as follows: in 1912, the defendant issued executions against
the plaintiff to collect ad valorem
taxes on the
"real estate, roadbed, and franchise value,
Page 236 U. S. 677
after crediting . . . one-half of one percent of the net income
. . . on that portion of its property known in its system,"
respectively, as the Augusta & Savannah Railroad and the
Southwestern Railroad. These roads were built under special
charters admitted to constitute irrepealable contracts, by which
the property was not subject to be taxed higher than one-half of
one percent upon the annual income, so that it may be assumed that
the present taxes could not be sustained if the roads still were in
the separate hands of the corporations that built them.
But in 1862, the Augusta & Savannah Railroad, and in 1869,
the Southwestern Railroad, made leases of their respective roads
and franchises to the Central Railroad & Banking Company of
Georgia during the continuance of the charters of the lessors. In
1892, the property of the lessee went into the hands of a receiver,
and the lessors, being allowed an election by the court, elected to
allow the property to remain in his hands, which it did until a
sale of the same and purchase, under a reorganization plan, by the
appellee, the Central of Georgia Railway Company. In 1895, by
agreement between the latter and the two lessors, the leases were
modified so as to run for one hundred and one years from November 1
of that year, renewable in like periods upon the same terms
forever. Notwithstanding these leases, the state has been content
down to this time to collect from the lessors the tax provided for
in their charter, but now, conceiving the state and its officers to
have been mistaken, the comptroller seeks to tax the whole property
to the lessee.
The executions are for taxes on property of the plaintiff, and
must show jurisdiction to issue them. Harris v. Smith,
Ga. 373, 374; Equitable Building & Loan Ass'n v.
115 Ga. 746. Here, the jurisdiction depends upon these
roads being in effect the plaintiff's property as matter of law. If
they are not, the attempt is an attempt
Page 236 U. S. 678
to tax the plaintiff upon property that it does not own. To
decide whether these taxes are such an unjustified exaction, we
must turn to the legislation of the state, bearing in mind that the
practical construction given to the law for nearly half a century
is strong evidence that the plaintiff's contention is right.
Wright v. Georgia R. & Banking Co., 216 U.
, 216 U. S. 426
Temple Baptist Church v. Georgia Terminal Co.,
The charter of the Augusta & Waynesboro' Railroad,
afterwards the Augusta & Savannah, approved December 31, 1838,
alongside of the taxing provision in § 13, to which we have
referred, provided as follows in § 16:
"That said company shall at all times have the exclusive use of
the said railroad, for the transportation or conveyance of
merchandise, goods, wares, and freight of every kind, and
passengers, over the said railroad, so long as they see fit to use
this exclusive privilege, and said company shall be authorized to
charge the same rates for freight or passage as are allowed in the
charter of the Georgia Railroad & Banking Company: Provided
always, that said company may, when they see fit, rent or farm out
all or any part of their exclusive right of transportation of
freight, or conveyance of passengers, with the privilege, to any
individual or individuals, or other company, and for such term as
may be agreed upon,"
it being added that the company, in the exercise of the right of
transportation, or the persons or company "so renting from said
company . . . shall, so far as they act on the same, be regarded as
It will be perceived that, when this section was drawn, it was
supposed that different persons might be allowed to put their
carriages upon the new form of road, as perhaps may be seen even
more clearly in other early charters in Georgia and elsewhere. And
the revenue that was to be derived from the exclusive privilege
granted might be
Page 236 U. S. 679
obtained by doing the whole business, by letting in others to
share a part of it, or by making a lease of the whole. Any one of
the three courses is permitted, one deemed as likely as another,
and also, so far as appears, all standing alike in the mind of the
legislature in respect of any legal effect upon the other grant of
The foregoing view of § 16 would lead us to believe that no
change in the matter of tax exemption was expected to follow from
the demise of the road, any more than it would have followed from
the admission of another carrier to partial rights, or of an
individual to carry his own goods. But that is only an introduction
to further considerations. We cannot suppose that the legislature
meant either to practise a cunning deception or to make a futile
grant. Therefore, we are unable to read the charter as making the
exemption vain by reserving to the state an unlimited right to
impose upon the lessee all that it had renounced as against the
lessor. For that was to give notice to the parties, if they were
supposed to know the law, that the exemption would be lost if the
income was earned in one of the contemplated ways, or if they were
supposed ignorant, was to invite them to a bargain that was to have
an unexpected and disastrous result.
After the charter came a special act of January 22, 1852, which
authorized the Central Railroad & Banking Company "to lease and
work for such time and on such terms as may be agreed on by the
parties interested," the two roads with which we are concerned,
among others, and reciprocally giving power to the corporations
owning those roads
"so to lease to the Central Railroad & Banking Company of
Georgia their respective railroads for such term of time and on
such other terms as they respectively may deem best."
In the interval, the railroad had become a railroad, but we see
no ground for believing that there had been any change in the
attitude of the state toward the pioneer enterprises
Page 236 U. S. 680
that it was encouraging a few years before. We still cannot
suppose that it was inviting the lessors to lose the benefit of
their exemption, or the lessees to find themselves entrapped with a
burden made possible only by accepting the invitation of the
We are not suggesting that the contract in the charters of the
lessors passed by assignment to the lessee, nor are we implying
that the property was exempted generally, into whosoever's hands it
might come. We are dealing only with the specific transaction
permitted and encouraged by the Acts of 1838 and 1852, and saying
that we cannot reconcile it with our construction of those acts to
allow that transaction to change the position for the worse. We
construe those statutes as making the fee exempt from other
taxation than that provided for, in favor as well of the lessee as
of the lessor, the protection of the lessee being necessary in
order to make good that promised to the lessor.
The present instruments, made in pursuance of the foregoing
powers in October, 1895, purport to "demise, lease, and to farm
let" the property for the term of one hundred and one years,
renewable as above stated. The lessee covenants to pay a fixed rent
semiannually and various expenses incident to taking over the
occupation of the road, and there is a clause of reentry in case of
failure for six months to make the semiannual payment as agreed.
Meantime, however, the Code of 1861 had introduced distinctions,
hard to grasp for one trained only in the common law of real
property, between the usufruct of a tenant and an estate for years,
Code of 1910, §§ 3685, 3687, 3690, 3691, and it is argued that
these leases created estates of such a nature that the lessee was
practically in the position of owner subject to a rent charge, and
was taxable for the land. We agree that technical distinctions are
to be avoided as far as may be in matters of taxation, and we are
not curious to insist upon the differences between
Page 236 U. S. 681
a lease, having about eighty-five years to run, that may, not
must, be renewed in perpetuity, and a fee subject to a rent charge.
But the disregard of technical distinctions is in the interest of
substantial justice, not for the purpose of enabling the state to
escape from a binding bargain. If we are right in our
interpretation of the statute from which the parties to the leases
got their powers, this later legislation of Georgia is immaterial,
or should not be construed as embracing an attempt to escape from a
contract by a subtlety that almost defies ingenuity to understand.
See Wright v. Georgia R. & Banking Co., 216 U.
, 216 U. S.
The executions, as we have said, must stand or fall on the
jurisdiction that they disclose. They attempt to tax the fee as the
property of the plaintiff. The injunction runs only against taxing
the plaintiff as owner. We discuss nothing but the question before
us. For the reasons that we have given, we are of opinion that the
taxes cannot be collected on the present executions. The court
cannot take the place of the taxing power. Yost v. Dallas
p. 236 U. S. 50
follows that the injunction must be sustained.
MR. JUSTICE LAMAR took no part in this decision.
MR. JUSTICE HUGHES, dissenting:
It has repeatedly been declared by this Court to be settled law
that tax exemptions, or tax limitations, are personal to the
grantee; that is, are nontransferable, and do not run with the
property unless the legislature has explicitly provided otherwise.
It has been held not to be enough that the grantee is authorized to
make a conveyance of all its property, estate, privileges, and
Page 236 U. S. 682
Morgan v. Louisiana, 93 U. S. 217
Wilson v. Gaines, 103 U. S. 417
Louisville & Nashville R. Co. v. Palmes, 109 U.
; Memphis &c. R. Co. v. Railroad
Commissioners, 112 U. S. 609
Chesapeake & Ohio Ry. v. Miller, 114 U.
; Picard v. Tennessee &c. R. Co.,
130 U. S. 637
St. Louis &c. R. Co. v. Gill, 156 U.
; Norfolk & Western R. Co. v.
Pendleton, 156 U. S. 667
Phoenix Fire Ins. Co. v. Tennessee, 161 U.
; Rochester Railway v. Rochester,
205 U. S. 236
the Court said in the last-mentioned case (p. 205 U. S. 248
after fully reviewing the authorities:
"A legislative authorization of the transfer of 'the property
and franchises,' . . . of 'the property,' . . . of 'the charter and
words,' . . . or of 'the rights of franchise and property,' . . .
is not sufficient to include an exemption from the taxing or other
power of the state, and it cannot be contended that the word
'estate' has any larger meaning."
And it was further held (p. 205 U. S. 252
that it must be regarded as the established rule
"that a statute authorizing or directing the grant or transfer
of the 'privileges' of a corporation, which enjoys immunity from
taxation or regulation should not be interpreted as including that
See also Wright v. Georgia R. & Banking Co.,
216 U. S. 420
216 U. S. 437
The controlling principle of these decisions is that, in view of
the supreme importance of the taxing power of the state, every
doubt must be resolved in favor of its continuance.
"This salutary rule of interpretation is founded upon an obvious
public policy, which regards such exemptions as in derogation of
the sovereign authority and of common right, and therefore not to
be extended beyond the exact and express requirement of the grants,
construed strictissimi juris.
Memphis &c. R. Co. v. Railroad Commission, supra
(p. 112 U. S.
"If the legislature can lay aside a power devolved upon it for
the good of the whole people of the state, for the benefit of a
private party, it must speak in such unmistakable terms that they
will not admit of any
Page 236 U. S. 683
reasonable construction consistent with the reservation of the
Picard v. Tennessee &c. R. Co., supra
130 U. S.
I do not find a word in the statutes of Georgia which confers
any immunity from the taxing power upon this appellee. The question
relates to its interest, not to that of the original companies.
What that interest or property may be, and how it is to be
assessed, is another question. The first inquiry is whether the
appellee has any immunity under the contract clause, and that, I
submit, is answered when it is found that it has no contract of its
own and no stipulation for a transfer to it of the immunity of
The principle which precludes the implication of such a transfer
applies equally to leases -- even leases for ordinary periods. A
lessee is in no better position to claim tax exemptions or
limitations than a mortgagee, or a purchaser at a foreclosure sale,
who, under legal authority, takes all the property, franchises, and
privileges of the mortgagor. The question as to a leasehold
interest was presented in Jetton v. University of the
South, 208 U. S. 489
There, the state had granted an exemption to the University of
1,000 acres of land. The University gave leases of lots within this
tract, and thus a village community was developed. An effort was
made by the state to tax the property against the University upon
the ground that the leases took it out of the exemption. But the
state court held otherwise; the property could not be taxed against
the University. University of the South v. Skidmore,
Tenn. 155. Thereupon the state, under new legislation authorizing
the taxing of leasehold interest, assessed the lessees, and the
University, with the lessees, brought suit in the federal court to
enjoin the collection of the taxes upon the ground of impairment of
contract. The circuit court entered a decree in favor of the
University, and enjoined the assessment. On the appeal to this
Court, it was urged in support of the decree that,
Page 236 U. S. 684
in taxing the leased property, the tax was placed upon the only
use to which the property could be put in order that it might be
made of benefit to the University. Indeed, it was said that the
assessment under the legislative act destroyed the value of the
exemption -- that is, that it was necessary to protect the lessee
in order to save the contract right. But this Court overruled these
contentions. It was thought to be
"plain that an exemption granted to the owner of the land in fee
does not extend to an exemption from taxation of an interest in the
same land, granted by the owner of the fee to another person as a
lessee for a term of years."
The immunity of the one gave no immunity to the other, and the
contract of exemption did not imply "in the most remote degree"
that the state would not thereafter "so change its mode of
assessment as to reach the interest of a lessee directly." The
state taxed what it had a right to tax, the lessee's interest, even
though it could not tax the University. The exemption, said the
"lasts only so long as the university owns the lands, and when
it conveys a certain interest in them to a third person, it no
longer owns that interest, which at once becomes subject to the
right of the state to tax it."
In the present case, it may be assumed that what the appellee
has, it has acquired lawfully, but it cannot claim to be immune
from taxation, or plead the contract of another.
I emphasize this, for it seems to me that its full recognition
is important to a proper determination of the case, and that what
is denied to the appellee under the contract clause should not be
asserted and permitted to have a dominating effect under another
name. Nor would there be any basis for an imputation of unfair
dealing or sharp practice, in case a state undertakes to tax the
property of a company which itself has no immunity from taxation,
simply because its grantor had an immunity which it was not able to
transfer. The appellee says in
Page 236 U. S. 685
its argument that it "is not claiming any tax exemptions," and,
as in fact it appears to have none, we should deal with the case
upon this footing.
What, then, is the relation of the appellee to the property in
question? Its predecessor, the Central Railroad & Banking
Company of Georgia, had leased the railroad properties of the
Augusta & Savannah and Southwestern Companies, respectively, in
perpetuity, or during the entire existence of the lessor companies.
The property of the Central Railroad & Banking Company of
Georgia was sold under foreclosure in 1895, and the appellee was
organized as a successor corporation, and leases to it of the
railroad properties in question were executed by both the original
companies "for the full term of one hundred and one years, and
renewable in like periods upon the same terms forever." The rental
in each case was the fixed sum of five percent on the amount of the
capital stock then outstanding -- that is to say, the sum of
$51,145 in the case of the Augusta & Savannah Company and
$259,555 in the case of the Southwestern Company. In short, under
what is termed a lease, the appellee took the entire property, to
hold, if it pleased, in perpetuity, subject to an annual charge of
the amounts specified.
Dealing with the substance of things, as we must when the
Constitution of the United States is involved, and not with mere
forms or names, I am unable to see how an ad valorem
against the appellee upon the property which it thus holds is a
violation of due process of law under the Fourteenth Amendment.
Under a system which tolerates such incongruities as the taxing of
the entire value of the land to the owner of the equity of
redemption, while the interest of the mortgagee is separately
taxed, it would seem to be difficult to find ground for a
constitutional objection to the treatment of the holder of a
perpetual lease as virtual owner. See J. W. Perry Co. v.
Norfolk, 220 U. S. 472
220 U. S. 478
In the language of Mr. Chief
Page 236 U. S. 686
Justice Bleckley in Wells v. Savannah,
87 Ga. 397, 399
(see 181 U. S. 181
531, 181 U. S.
"The value of property consists in its use, and he who owns the
use forever, though it be on condition subsequent, is the true
owner of the property for the time being. This holds equally of a
city lot or all the land in the world. Where taxation is ad
values are the ultimate objects of taxation, and they
to whom the values belong should pay the taxes. Land sold or by a
contract of bargain and sale demised forever, subject to a
perpetual rent, is taxable as corporeal property, and in private
hands the rent also is taxable as an incorporeal hereditament. The
tax on the former is chargeable to the purchaser or perpetual
tenant, and on the latter to the owner of the rent."
It can hardly be said that it makes a constitutional difference
that a so-called lessee, who may enjoy forever, if it chooses, has
also the privilege of giving up the property at the renewal dates.
Nor do I understand it to be important, under the federal
Constitution, how the interest of the appellee -- which in
substance is ownership -- is technically described. Surely, the
Fourteenth Amendment is not concerned with mere technicalities of
tenure; these the state is free to abolish. And it should be added
that we do not have here any question of double taxation, as the
state has credited to the appellee against the tax demanded the
one-half of one percent upon the net income, which was payable by
the original companies, and the payment of which the appellee had
In considering the constitutional capacity of the state, we are
dealing, of course, with the question as to what it may do by the
exercise of all the power it possesses, and not merely with the
interpretation of its existing statutes. Castillo v.
McConnico, 168 U. S. 674
168 U. S. 683
I recognize fully the difficulties in this case so far as it has to
do with the interpretation and application of the Georgia tax laws.
And if it were the decision of the Court as a mere matter of
Page 236 U. S. 687
construction of the local law -- in the absence of a controlling
local decision -- that the statutes of Georgia did not justify the
assessment actually made, I should withhold this expression of
dissent, for that would leave the matter, as I conceive it should
be left, within the control of the courts and legislature of the
state so far as the mere imposition of an ad valorem
upon the property held and enjoyed by the appellee is
But I am unable to concur in the view that the tax here sought
to be collected violates the Constitution of the United States.
I am authorized to say that MR. JUSTICE PITNEY concurs in this
MR. JUSTICE McREYNOLDS also dissents.