1. Under § 1 of the Federal Control Act, and § 6 of the standard
form of contracts made pursuant thereto between the Director
General of railways and railroads taken over by the government,
whereby the Director General was either to pay out of the revenues
derived from railway operations "during the period of federal
control," or save the company harmless from, all taxes lawfully
assessed under federal or other governmental authority "for any
part of said period," except "war taxes" assessed against the
company under the Revenue Act of 1917 or any Act in addition
thereto or amendment thereof, the obligation of the Director
General to bear the normal income taxes of a railroad corporation
was limited to those "assessed for the period of federal control,"
and did not extend to income taxes under the Revenue Act of 1921,
assessed for the year 1921, on income received by the company in
that year (after termination of federal control) from the Director
General in compensation for the use of its properties during
federal control. P.
271 U. S.
312.
Page 271 U. S. 311
2. The divisions of income taxes prescribed by Revenue Act of
1918, § 230(b), between the Director General of Railroads and
railroad companies did not apply to income taxes imposed by Revenue
Act of 1921, and the latter prescribed no such divisions.
Id.
61 Ct.Cls. 11 reversed.
Cross-appeals from a judgment of the Court of Claims in a suit
to recover money collected from the plaintiff railway companies as
income tax.
MR. JUSTICE BUTLER delivered the opinion of the Court.
The United States appeals from a judgment in favor of plaintiffs
for $21,295.62, being 2 percent tax on their consolidated income
for 1921. Plaintiffs have taken a cross-appeal, and insist that the
court erred in failing to add their expenses and attorney's
fees.
The Pittsburgh Company owned all the capital stock of the West
Side Company. Their railroads were taken over by the President and
were operated under federal control from January 1, 1918, to March
1, 1920. They failed to make any agreement with the Railroad
Administration as to just compensation to be paid them for the use
of their properties until final settlement was made July 1, 1921.
At that time, there was paid to plaintiffs $1,570,000 in addition
to $250,000 which had been paid on account in January, 1920. And
the Director General assumed, in respect of the payment of taxes,
the obligations which are specified in § 6 of the standard form
contract authorized by the Federal Control Act, March 21, 1918, §
1, c. 25, 40 Stat. 451.
Page 271 U. S. 312
Plaintiffs made returns and paid the full amount of federal
taxes for 1918 and 1919, respectively. These included nothing
received as compensation for the use of their properties. The
Director General reimbursed them to the extent of the normal taxes.
Plaintiffs made their return and paid their taxes for 1920. Their
income in that year included the $250,000 paid on account. As
federal control ended March 1, the Director General declined to
allow more than one-sixth of the tax. The plaintiffs' taxable net
income for 1921 was $1,064,781.39. This, because of deductions
allowed, was less than the payment at final settlement. In 1923,
upon plaintiffs' insistence, the Bureau of Internal Revenue held
that the compensation received in 1921 for the use of their
properties during federal control was income for that year, and
that none of it was attributable to the period of federal control.
Subsequently plaintiffs called on the Railroad Administration for
payment of $21,295.62, 2 percent of their income.
The question for decision is whether plaintiffs' income tax for
1921 was "assessed for the period of federal control," within the
meaning of the Federal Control Act and the authorized standard
contract.
Section 1 of the Federal Control Act required that every such
agreement should provide that federal taxes under the Revenue Act
of 1917 (40 Stat. 300), or Acts in addition thereto or in amendment
thereof, commonly called war taxes, "assessed for the period of
federal control beginning January first, nineteen hundred and
eighteen, or any part of such period" should be paid by the carrier
out of its own funds or should be charged against or deducted from
the just compensation; that other taxes assessed "for the period of
federal control or any part thereof," should be paid out of
revenues derived from operations while under federal control.
The authorized standard form of contract, § 6(a), provided that
all war taxes assessed against the company
Page 271 U. S. 313
under the Revenue Act of 1917 or any Act in addition thereto or
in amendment thereof should be paid by the company. And paragraph
(c) provided that the Director General should either pay out of
revenues derived from railway operations "during the period of
federal control," or save the company harmless from all taxes
lawfully assessed under federal or other governmental authority
"for any part of said period," except the taxes and assessments for
which provision was made in paragraph (a).
The tax of 2 percent imposed by § 10 of the Revenue Act of 1916
was known as the normal tax. The additional tax of 4 percent
imposed by § 4 of the Revenue Act of 1917 was a war tax. Section
230(a) of the Revenue Act of 1918 provided that, in lieu of the 2
percent normal tax and the 4 percent war tax, there should be paid
for the calendar year 1918 a tax of 12 percent of net incomes and
for each year thereafter 10 percent. Section 230(b) provided that,
for the purpose of the Federal Control Act, five-sixths of the 12
percent tax and four-fifths of the 10 percent tax should be
"treated as levied by an Act in amendment of Title I of the Revenue
Act of 1917." Thus, it was plainly indicated that the tax to be
borne by the Director General was the 2 percent. The amount in
controversy is 2 percent of the income tax for 1921. It was
assessed under the Revenue Act of that year, which provided that,
in lieu of taxes imposed by the Act of 1918, there should be paid
10 percent of net incomes for 1921 and 12 1/2 percent for each year
thereafter. The divisions between the Director General and the
corporation, prescribed by subdivision (b) of § 230 of the Act of
1918. applied only to taxes imposed by subdivision (a) of that
section. No divisions were prescribed by the Act of 1921. Those
made by the earlier Act were not intended to apply to taxes imposed
by the Act of 1921, and neither of them would produce the two
percent normal tax if applied to 12 1/2 percent, the rate for each
year after 1921.
Page 271 U. S. 314
The provisions of § 6 of the standard form of contract, the
Federal Control Act, and Revenue Acts are to be read together. When
this is done, it is clear that the obligation of the Director
General to bear the normal income taxes of the corporations did not
go beyond those assessed for the period of federal control. That
obligation was not held down to the normal tax on amounts received
as compensation for the use of their properties, but extended to
the normal tax assessed for that period on all incomes taxed,
without regard to source. But it cannot be held to extend to taxes
on incomes for 1921 without excluding from consideration the
provisions of the Federal Control Act and standard agreement
clearly limiting the obligation to taxes assessed for the period of
federal control. The meaning of these provisions is plain. There is
no room for construction. The period in which the assessments were
made governed. The sources of taxable incomes were not regarded. It
would be contrary to the plain language of the statute and contract
to hold the United States liable for any part of the taxes for
1921. Plaintiffs were not entitled to recover.
Their cross-appeal depends upon a provision contained in § 6 of
the standard contract binding the Director General to pay or save
the company harmless from expense of suits respecting the classes
of taxes payable by the Director General under the agreement. As
the tax was not so payable, plaintiffs take nothing by their
cross-appeal.
Judgment reversed.
MR. JUSTICE BRANDEIS took no part in the consideration or
decision of this case.