1. The meaning of "income," as used in § 38 of the Corporation
Excise Tax Law of 1909,
held, in its application to the
case, not distinguishable from the meaning of the same word in the
Income Tax Law of 1913 and the Revenue Act of 1916. P.
268 U. S.
631.
2. The Sixteenth Amendment, like other laws authorizing or
imposing taxes, is not to be extended beyond the meaning clearly
indicated by its words. P.
268 U. S. 631.
3. Money subsidies granted by the Cuban government to a railroad
company of this country, to promote the construction of railroads
in Cuba and in consideration also of reduced rates to the public as
well as reduced rates and other privileges for the government, and
which were fixed and paid proportionately to mileage actually
constructed, and were used for capital expenditures by the company,
though not entered on its books as in reduction of cost of
construction,
held not income within the Sixteenth
Amendment. P.
268 U. S.
632.
Affirmed.
Error to a judgment for plaintiff railroad in the district court
in an action to recover money paid as income and corporation excise
taxes.
MR. JUSTICE BUTLER delivered the opinion of the Court.
Plaintiff, a New Jersey corporation, owns and operates a
railroad in Cuba. In March, 1917, it made return of its income for
1916, and, in due time, paid the tax assessed
Page 268 U. S. 629
on the basis of its return. Plaintiff had received in 1911 to
1916, inclusive, subsidy payments from the republic of Cuba,
amounting in all to $1,696,216.20, but did not report any part of
them as taxable income. January 1, 1918, the Commissioner of
Internal Revenue assessed against plaintiff for 1916 an additional
tax of $33,924.32, being 2 percent -- the rate prescribed in the
Revenue Act of 1916 (Act Sept. 8, 1916, c. 463, 39 Stat. 756) -- on
the total of such payments. Notwithstanding its objection that the
assessment was without authority of law, plaintiff was required to
pay the tax. It applied for refund. The commissioner adhered to the
view that the amounts so received constituted income, but held that
the payments were taxable in the years when received. Prior to the
act of 1916, the tax rate was one percent. There was repaid to
plaintiff one percent on the payments made before that year, but
its application was denied as to the balance, $20,239.18. This
action was brought to recover that amount with interest. The
complaint alleged that the subsidy payments were not income within
the meaning of the Sixteenth Amendment. Defendant moved to dismiss
the case on the ground that the complaint failed to state a cause
of action. The court denied the motion and gave judgment for
plaintiff. Defendant brought the case here on writ of error.
Judicial Code § 238.
An act of the Congress of the Republic of Cuba of July 5, 1906,
authorized the President to contract with one or more companies for
the construction and operation of certain lines of railroad on
designated routes between places specified. The republic granted a
subsidy up to $6,000 per kilometer, payable in six annual
installments, to the companies constructing and maintaining in use
the specified lines. Any company having such a contract was
entitled to receive subsidies for that part of the railroad
constructed after the passage of the act, as well as for the
Page 268 U. S. 630
part constructed after the making of the contract. March 25,
1909, the President of the republic and the plaintiff made a
contract by which the latter agreed, in consideration of $6,000 per
kilometer to be paid by the republic as specified in the law of
1906, to construct and operate a railroad on the routes and between
the places specified, and the plaintiff agreed to reduce by
one-third the tariffs then in force for the transportation of
permanent employees and troops of the government, and, in case of
war or any disturbance of the public order, to transport troops in
special trains at the rate of one cent per man per kilometer, and
also agreed to reduce the fares for all first-class passengers. The
entire line covered by this contract was completed in 1911. The
subsidy payments amounted in all to $1,642,216.20, about one-third
of the cost of the railroad.
An act of June 1, 1914, added to the law of 1906 an article
which provided that the subsidy per kilometer for the construction
of a railroad from Casilda to Placetas del Sur should be 6,000
pesos for a part and 12,000 pesos for the rest of the distance.
June 30, 1915, in accordance with that act, the president of the
republic and plaintiff made a contract for the construction of the
railroad. It bound the company to carry public correspondence free
of charge on the lines of this railroad, to carry small produce for
50 percent of the tariff, and to allow telegraph and telephone
stations to be established by the government alongside the
railroad. And there was handed over to the plaintiff certain land,
buildings, construction and equipment then in the possession of the
state, which theretofore had been acquired and built in an earlier
effort to complete that line. The subsidy payment in 1916 was
$54,000.
All the subsidy payments under both contracts were credited to a
suspense account, and, June 30, 1916, were transferred to the
surplus account, and were used for
Page 268 U. S. 631
capital expenditures. The cost of construction as carried on the
books was not reduced by such payments.
The power given Congress by the Sixteenth Amendment is to "lay
and collect taxes on incomes from whatever source derived."
Defendant insists that the subsidy payment made in 1916 was taxable
under the Revenue Act of 1916, which imposes an annual tax of 2
percentum "upon the total net income received . . . from all
sources by every corporation" (c. 463, 39 Stat. 765); that the
payments made in 1913, 1914, and 1915 were taxable under Income Tax
Law Oct. 3, 1913, c. 16, 38 Stat. 114, 172, which imposes an annual
tax of one percentum "upon the entire net income arising or
accruing from all sources . . . to every corporation," and that the
payments made in 1911 and 1912 were taxable under Corporation
Excise Tax Law Aug. 5, 1909, § 38, c. 6, 36 Stat. 11, 112, which
provides that
"every corporation . . . 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 entire net income . . . from all sources."
Defendant insists that the subsidies were merely payments in
advance on account of transportation service, later to be performed
by the plaintiff for the government, and therefore are to be deemed
income and taxable as such.
In respect of these subsidy payments, the meaning of "income,"
as used in the Corporation Excise Tax Law of 1909 is not to be
distinguished from the meaning of the same word as used in the
Income Tax Law of 1913 and the Revenue Act of 1916.
Merchants'
Loan & Trust Co. v. Smietanka, 255 U.
S. 509,
255 U. S.
518-519.
The Sixteenth Amendment, like other laws authorizing or imposing
taxes, is to be taken as written, and is not to be extended beyond
the meaning clearly indicated by the language used. The Cuban laws
and contracts are similar
Page 268 U. S. 632
to legislation and arrangements for the promotion of railroad
construction which have been well known in the United States for
more than half a century. Such aids, gifts and grants from the
government, subordinate political subdivisions, or private sources
-- whether of land, other property, credit or money -- in order to
induce construction and operation of railroads for the service of
the public are not given as mere gratuities.
Burke v. Southern
Pacific R. Co., 234 U. S. 669,
234 U. S. 679;
Louisville & Nashville R. Co. v. United States,
267 U. S. 395.
Usually they are given to promote settlement and to provide for the
development of the resources in the territory to be served. The
things so sought to be attained in the public interest are numerous
and varied. There is no support for the view that the Cuban
government gave the subsidy payments, lands, buildings, railroad
construction, and equipment merely to obtain the specified
concessions in respect of rates for government transportation.
Other rates were considered. By the first contract, plaintiff
agreed to reduce fares for first-class passengers, and, by the
second, it agreed to reduce the rates on small produce. Clearly,
the value of the lands and other physical property handed over to
aid plaintiff in the completion of the railroad from Casilda to
Placetas del Sur was not taxable income. These were to be used
directly to complete the undertaking. The Commissioner of Internal
Revenue, in levying the tax, did not include their value as income,
and defendant does not claim that it was income. Relying on the
contract for partial reimbursement, plaintiff found the money
necessary to construct the railroad. The subsidy payments were
proportionate to mileage completed, and this indicates a purpose to
reimburse plaintiff for capital expenditures. All -- the physical
properties and the money subsidies -- were given for the same
purposes. It cannot reasonably be held that one was contribution to
capital assets and that the other was profit, gain, or
Page 268 U. S. 633
income. Neither the laws nor the contracts indicate that the
money subsidies were to be used for the payment of dividends,
interest ,or anything else properly chargeable to or payable out of
earnings or income. The subsidy payments taxed were not made for
services rendered or to be rendered. They were not profits or gains
from the use or operation of the railroad, and do not constitute
income within the meaning of the Sixteenth Amendment.
See
Stratton's Independence v. Howbert, 231 U.
S. 399,
231 U. S. 415;
Eisner v. Macomber, 252 U. S. 189,
252 U. S. 207;
Merchants' Loan & Trust Co. v. Smietanka, supra.
Judgment affirmed.