Payment of the income taxe of a lessor pursuant to a provision
of the lease obliging the leee to pay all taxe upon the lessor's
property or income constitutes additional taxable income of the
lessor. P.
279 U. S.
734.
Response to a question of law certified by the circuit court of
appeals arising upon review of a judgment of the district court
recovered by the Railroad Company in an action for money collected
as income taxes.
See also the case preceding this, and 7
B.T.A. 648.
MR. CHIEF JUSTICE TAFT delivered the opinion of the Court.
As indicated in
Old Colony Trust Co. v. Commissioner,
ante, p.
279 U. S. 716,
this case
Page 279 U. S. 733
comes here by certificate from the Circuit Court of Appeals for
the First Circuit and on the following statement:
"This action is brought by the Boston & Maine Railroad to
recover income taxes for the year 1917, claimed to have been
erroneously collected. In the district court (for the District of
Massachusetts) the plaintiff recovered a judgment for the full
amount of its demand -- $3,920.55 and interest."
"June 30, 1900, the Fitchburg Railroad Company leased all its
railroad and property of every description to the Boston &
Maine Railroad for the term of ninety-nine years. In the lease, the
lessee covenanted to pay specified rentals, to maintain and replace
the leased properties in manner indicated, to pay all operating
expenses, and to pay"
"all taxes of every description, federal, state, and municipal,
upon the lessor's property, business, indebtedness, income,
franchises, or capital stock, or said rental,"
and to pay divers other charges. In 1918, an income tax return,
under the provisions of the Revenue Acts of 1916 (39 Stat. 756) and
1917 (39 Stat. 1000), was filed on behalf of the Fitchburg Railroad
Company for the calendar year 1917, upon which taxes amounting to
$61,422.06 were assessed. These taxes were paid to the Commissioner
of Internal Revenue by the Boston & Maine Railroad pursuant to
the term of the lease. The Fitchburg Railroad Company was
consolidated with the Boston & Maine Railroad in 1919.
"In 1921, the Commissioner of Internal Revenue assessed an
additional income tax against the Fitchburg Railroad Company of
$3,920.55. In doing this, he treated the payment of $61,422.06 made
by the Boston & Maine Railroad to the collector of internal
revenue as additional taxable income to the Fitchburg Railroad
Company to the extent of $65,342.61. This additional tax of
$3,920.55 was paid to the collector of internal revenue by the
Boston & Maine Railroad in July, 1921. "
Page 279 U. S. 734
"The claim for refund of this additional tax was duly filed with
the Commissioner of Internal Revenue, but was never formally acted
upon, and, more than six months having elapsed after it was filed,
this action was brought for the recovery of the tax so paid (under
par. 20, Section 24 of the Judicial Code, as amended by Sec.
1310(c), c. 136, 42 Stat. 310)."
The judgment of the district court was appealed to the Circuit
Court of Appeals for the First Circuit, and, upon the facts
recited, and under ยง 239 of the Judicial Code, as amended by the
Act of February 13, 1925, c. 229, 43 Stat. 936, 938, the court of
appeals has asked the instruction of the Supreme Court upon the
following question:
"Did the payment by the lessee of the net income taxes
assessable against the lessor constitute additional taxable income
to such lessor?"
The merits of this case must be disposed of in accord with the
rule already laid down in the
Old Colony case, just
decided. Like that, it is one in which the lessee has paid to the
government the taxes due under the law from the lessor. The payment
is made in accord with the contract of lease, and is merely a
shortcut whereby that which the lessee specifically agreed to pay
as part of the rental effects that payment by discharging the
obligation of the lessor to pay the tax to the government.
Our conclusion is in accordance with the practice of the
Department. Treasury Decision 2620 (19 Treas.Dec. 411). In answer
to a question suggested by this Court, the Commissioner states in
the appendix to the government's brief on reargument in No. 130
that it has been the uniform practice to treat taxes paid, where by
agreement between the parties the tax laid upon the income actually
received by one of them has been paid by the other, as income of
the taxpayer whose liability has thus been discharged. He refers to
the decision of the Circuit Court
Page 279 U. S. 735
of Appeals for the First Circuit in the case of
West End
Railway Co. v. Malley, 246 F. 625, where the dividends paid by
a lessee corporation directly to the stockholders of the lessor
corporation were held to be income to the lessor under the Revenue
Act of October 3, 1913 (38 Stat. 114). It was carried into
Regulation 33, promulgated January 2, 1918, as Article 102, reading
as follows:
"ART. 102. Leased Properties. -- When a corporation shall have
leased its property in consideration that the lessee shall pay in
lieu of rental an amount equivalent to a certain rate of dividends
on its capital stock or the interest on its outstanding
indebtedness, together with taxes, insurance, or other fixed
charges, such payments shall be considered rental payments and
shall be returned by the lessor corporation as income,
notwithstanding the fact that the dividends and interest are paid
by the lessee direct to the stockholders and bondholders of the
lessor. The lessee, in making these payments direct to the
bondholders and the stockholders, does so as the agent of the
lessor, and the latter is nonetheless liable to return the amounts
thus paid as income and to pay any tax that may be due
thereon."
Article 102 of Regulations 33 has been substantially embodied in
all subsequent regulations as Article 546 of Regulations 45,
Article 547 of Regulations 62, 65 and 69, and Article 70 of
Regulations 74, promulgated under the Revenue Acts of 1918, 1921,
1924 , 1926, and 1928, respectively.
Article 109 of Regulations 45, promulgated January 28, 1921,
reads as follows:
"Taxes paid by a tenant to or for a landlord for business
property are additional rent and constitute a deductible item to
the tenant and taxable income to the landlord, the amount of the
tax being deductible by the latter."
This provision is also found in Article 109 of Regulations 62,
Article 110 of Regulations 65 and 69, and Article 130 of
Regulations 74.
Page 279 U. S. 736
In addition to the foregoing general provisions, a specific
ruling on this question was published in May, 1920, as A.R.M., 16
C.B. 2, p. 62. The facts in that case are stated by the
Commissioner as follows:
"A contract was entered into in July, 1917, between the P
Company and the M Company whereby the latter agreed to sell certain
goods on a cost-plus basis. It was provided that the P Company
should pay federal taxes assessed on the profits accrued from this
contract to the M Company. Performance under the contract was made
by the M Company during 1918. In October, 1918, the P Company
closed its books upon an accrual basis and made no provision for
any taxes arising out of the contract. It was there held that the
amount of taxes of the M Company paid by the P Company was income
to the M Company for the year for which such payment was made. This
ruling was followed not only in the case in which rendered, but
also as a precedent in all other similar cases."
The Commissioner says that no single instance has been found
where the Bureau has departed from this general practice of
construing taxes paid under the present circumstances to be income
to the taxpayer whose tax liability has been discharged in such a
manner.
The Commissioner says that it was the purpose of the
instructions to establish a consistent policy, and that, if they
have not been followed in individual cases, it is due to an
unauthorized departure from the Bureau's instructions. More than
this, it should be added that neither before nor since 1923 has any
algebraic formula been used by the Bureau in computing taxes.
Not only, therefore, is the conclusion that the question must be
answered "Yes" sustained by the practice of the Department under
all of the Revenue Acts, but the cases cited in the
Old
Colony case require the same view.