Opinion
Caesar L. Aiello, of Washington, D. C. (Theodore K. Warner, Jr., and William R. Bready, III, both of Philadelphia, Pa., and McKenney, Flannery & Craighill, of Washington, D. C., on the brief) for plaintiff.
John A. Rees, of Washington, D. C., and Sewall Key, Acting Asst. Atty. Gen. (Robert N. Anderson and Andrew D. Sharpe, both of Washington, D. C., on the brief), for defendant.
Before JONES, Chief Justice, and HOWELL, MADDEN, WHITAKER and LITTLETON, Judges.
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following
Special Findings of Fact
1. Plaintiff is and at all times hereinafter mentioned was a corporation organized and existing under the laws of Pennsylvania (and other states) having its principal office in Philadelphia, Pennsylvania. It was authorized by its charter and by-laws to be a railroad company and as such is subject for certain purposes to the Act of Congress approved February 4, 1887, and amendments thereof, commonly referred to as The Interstate Commerce Act, 49 U.S.C.A. § 1 et seq.
2. As required by law, plaintiff on September 26, 1938, duly filed with the Collector of Internal Revenue at Philadelphia, Pennsylvania, who had granted an extension of time for that purpose, a federal capital stock tax return for the taxable year ending June 30, 1938, and reported thereon as a declared value of its entire capital stock the sum of $84,860,000. That return contained the statement 'Exemption Claimed,' and reported no tax due. There was attached to that return an affidavit which set out various facts with respect to the organization, operation, and status of the corporation during the fiscal year ending June 30, 1938, on the basis of which plaintiff claimed exemption from the capital stock tax law on the ground that it was not doing business within the meaning of the applicable statute during the fiscal year ending June 30, 1938.
October 17 and 20, 1939, the Commissioner of Internal Revenue advised plaintiff that its claim for exemption from capital stock tax liability was denied and that a tax plus accrued interest thereon would be assessed upon the return as filed. October 20, 1939, an assessment was made of $84,860 due on the return for the year ending June 30, 1938, and $6,205.23 as statutory interest thereon from the due date of the tax to the date of the assessment. After appropriate notice and demand and a further exchange of communications between the parties, plaintiff paid the sum of $91,065.23 on November 16, 1939.
December 2, 1939, plaintiff filed a formal claim for refund of the tax and interest which was assessed and collected as shown above. The Commissioner rejected that claim for refund and advised plaintiff of his action by registered letter dated August 18, 1941.
3. Plaintiff was organized under an agreement of consolidation and merger dated September 28, 1916, effective January 1, 1917, of the capital stock, franchises and property (real personal and mixed) of five existing railroad corporations as follows: The Pittsburgh, Cincinnati, Chicago and St. Louis Railway Company; Vandalia Railroad Company; Pittsburgh, Wheeling and Kentucky Railroad Company; The Anderson Belt Railway Company; and Chicago, Indiana and Eastern Railway Company.
Plaintiff was incorporated in the State of Pennsylvania on December 21, 1916, in the States of Illinois, Indiana, and West Virginia on December 29, 1916, and in the State of Ohio on December 30, 1916. It was organized for the purpose of operating and until January 1, 1921, did operate as one consolidated unit the railway lines and business of the five operating railroads named above.
These five railroads were not parallel or competing lines but were so located as to form a continuous railroad system approximately 2,000 miles in length. After the execution of a lease agreement hereinafter referred to, these railroads became an integral part of the system of the Pennsylvania Railroad Company.
4. When organized in 1916 plaintiff had an authorized capital stock of $100,000,000. Under the agreement of consolidation, it issued $84,610.166.08 of its capital stock to the holders of capital stock in the five corporations included in the consolidation and $250,000 of the capital stock to the holders of mortgage bonds in one of the corporations. In acquiring the properties of these five corporations, plaintiff assumed and became responsible for the payment of the bonded indebtedness and all other indebtedness against the five corporations.
From 1916 until January 1, 1921, plaintiff operated the railway lines brought together by the consolidation as a consolidated unit, such operation being sometimes referred to as the 'Panhandle.'
5. March 26, 1921, plaintiff and the Pennsylvania Railroad Company, a Pennsylvania corporation, executed a lease effective as of January 1, 1921, which appears as Exhibit E to plaintiff's petition and which is incorporated herein by reference. Under and by virtue of the lease, plaintiff granted, demised, and leased to the Pennsylvania Railroad Company, as lessee, all its property, rights, privileges, and franchises for a term of 999 years; 'Provided always however, that nothing herein contained shall operate to grant or demise the franchise to be a corporation possessed by the Lessor, or any other right, privilege or franchise which is or may be necessary to fully preserve the corporate existence or organization of the Lessor.' Included as a part of the property owned by plaintiff at that time were three leases, one of which was executed in 1870, another executed in 1879, and another executed in 1892. These were likewise assigned and transferred to the Pennsylvania Railroad Company under the lease.
6. Under the lease the Pennsylvania Railroad Company agreed to pay plaintiff (a) as fixed annual rental a sum equivalent to 4 percent per annum until December 31, 1925, upon the par value of plaintiff's outstanding capital stock and 5 percent thereafter, which covers the period with which we are concerned, such payments to be net amounts without deduction for taxes which are required to be withheld other than Federal income tax on the stockholders; (b) a sufficient sum each year to enable plaintiff to pay the interest and satisfy its sinking fund obligation upon its bonded or other indebtedness and upon any later bonds which might be issued with the lessee's approval; and (c) a sufficient sum to enable plaintiff to maintain its corporate organization, including reasonable organization, administration and legal expenses. In addition, the Pennsylvania Railroad Company was required to pay all taxes and assessments levied against the demised property, all amounts required under plaintiff's leases with certain sublessor companies, and all claims which might arise by reason of the lessee's possession, management, and operation of the leased properties.
7. The Pennsylvania Railroad Company, as lessee, agreed to manage and operate the properties as required by law and at its expense to keep the demised equipment and premises in thorough repair, working order and condition, so that the business of the demised railroads would be preserved and developed and all future growth of such business duly provided for; provided that any real and personal property of the lessor which, in the opinion of the lessee, was not necessary to the continued or prospective use of the leased railroads might, with the consent of the lessor evidenced by a resolution of its board of directors, be sold from time to time by the lessee who agreed to receive the proceeds of any sale and apply the same with due regard to any mortgages thereon to betterments or improvements upon or additions to the leased railroads and property of the lessor. The lessor agreed to execute and deliver such conveyances of the property so sold as might be necessary, when requested to do so by the lessee. The lessee further agreed to make such improvements upon the betterments and additions to the demised premises as in the lessee's judgment were necessary to enable it to properly operate the railroads, including the acquisition of additional rights-of-law, construction or acquisition of extensions, branch railroads, or additional yards, new stations, or depots and other buildings, equipment or facilities. The lessee agreed to furnish money for such improvements and to carry out the work incident thereto but the cost thereof was to constitute an indebtedness of the lessor to the lessee subject to prompt payment in money or in bonds or capital stock, or both, of the lessor at the election of the lessee.
The lessor agreed that whenever requested by the lessee it would execute any and all instruments for the purpose of carrying out the terms of the lease and the lessee similarly agreed to execute any and all instruments to assure payment of the agreed rent and performance of the other promises and agreements in the lease. The lessee agreed at the end of the term of the lease or at an earlier termination thereof to return to the lessor the leased railroads and other property in as good order and condition as when received, or to reimburse lessor for the cost to it of putting it in such good order and condition. It was further provided that the lease should terminate upon the failure of the lessee to pay the agreed rent or any part thereof if such default continued for thirty days, and that the lease would likewise terminate upon failure of the lessee to keep and perform any of the other covenants and agreements if such default continued for ninety days after notice thereof in writing given by the lessor.
8. The lease has been in effect since its execution and both parties have at all times complied with the terms thereof.
9. At all times since March 26, 1921, and during the fiscal year ended June 30, 1938, plaintiff maintained its principal office at Philadelphia, Pennsylvania, and also offices in Pittsburgh, Pennsylvania, Wheeling, West Virginia, Columbus, Ohio, Indianapolis, Indiana, and Chicago, Illinois. All of these offices were located in offices of the Pennsylvania Railroad and all work performed in these offices for plaintiff was performed by employees of the Pennsylvania Railroad without compensation from plaintiff. During the fiscal year ended June 30, 1938, as well as prior and subsequent thereto, plaintiff had a full complement of officers such as are ordinarily had by a railroad company, that is, president, vice-presidents, secretary, assistant secretaries, treasurer, assistant treasurers, etc. The individuals who held these offices held the same offices with the Pennsylvania Railroad with one or two exceptions. Practically all of their time was occupied with matters of the Pennsylvania Railroad Company from whom they received compensation and they received no compensation from plaintiff. Plaintiff had fifteen directors, of whom ten were also directors of the Pennsylvania Railroad and five were not directors of the Pennsylvania Railroad. Except for the officers and directors referred to above, plaintiff had no employees and paid no salaries, all the work of plaintiff of every character being performed by the officers and employees of the Pennsylvania Railroad. All reports to the Interstate Commerce Commission and other regulatory bodies were prepared and filed by officers and employees of the Pennsylvania Railroad Company.
During the fiscal year ended June 30, 1938, plaintiff had issued and outstanding 847,210 shares of capital stock of a par value of $100 per share, of which 99.4 percent was owned by the Pennsylvania Railroad Company and its affiliated interests (see finding 16).
10. During the fiscal year ended June 30, 1938, plaintiff's stockholders had one meeting and its board of directors had four meetings. All of these meetings were held in the offices of the Pennsylvania Railroad Company in Philadelphia, Pennsylvania, where plaintiff's books and records were kept. The only business transacted at the stockholders' meeting was the approval of the annual report of its president and board of directors and the election of directors. Approximately 99.64 percent of the entire outstanding capital stock was voted at the meeting.
At the directors' meetings, business was transacted as follows:
(a) Approved reports of sales of real estate involving consideration for each parcel of not exceeding $10,000 in any one sale. These sales were made in accordance with Article Ninth of the lease agreement which read in part as follows: 'Such real and personal property of the Lessor as shall not, in the opinion of the Lessee, be necessary for the then present or prospective use of the Lessor's railroads, or for the protection of the interests of the said Lessor therein, may, with the consent of the Lessor, evidenced by Resolution of its Board of Directors, and in accordance with the provisions of any mortgage or mortgages covering same, be sold from time to time by the Lessee, and the Lessor shall, upon the request of the Lessee, execute and deliver such proper conveyance and assurances of the property so sold as may be necessary to effectuate such sales. The proceeds of all such sales shall enure and be paid to the Lessee and shall be applied at its option either to the reduction of the funded debt of the said Lessor or to betterments and improvements upon or additions to the railroads and property hereby demised, but not, however, in disregard of the provisions of any mortgage or mortgages covering such property,' and in accord with a resolution ofof plaintiff's board of directors dated April 27, 1927, reading as follows:
'Resolved. That sales of real estate of this Company which, in the opinion of the President or Vice-President, shall be no longer necessary or useful for the operation or conduct of the Company's railroad, and involving a consideration for each parcel of real estate of not exceeding $10,000, may be made upon such terms and for such consideration as in the judgment of the President or Vice-President are just and reasonable, and they or either of them are authorized to enter into and execute in the name of the Company contracts or agreements for the sale of such real estate; the authority so exercised to be reported to the next meeting of the Board. 'Resolved, That the proper officers are authorized and empowered, in the event of such sales, to execute deeds and all papers or instruments in connection therewith, to affix the corporate seal thereto, and to acknowledge and deliver the same, all with the same force and effect as if a special resolution were adopted by the Board in each case.'
These sales were made by the Pennsylvania Railroad Company which determined what properties would be sold, and approval of such sales was given by the board of directors of plaintiff as required by the lease agreement. The proceeds of such sales were turned over to the Pennsylvania Railroad Company, in accordance with the lease agreement, to apply towards expenditures for additions, betterments and improvements to the leased properties. Some of these sales resulted in profits and others in losses, the losses being in excess of the profits, that is, a net loss, for the fiscal year ended June 30, 1938.
(b) Approved expenditures by the Pennsylvania Railroad Company for additions, betterments, and improvements to the leased properties, including properties of plaintiff's sublessor companies, as required by the lease agreement.
(c) Approved charges and credits to plaintiff's capital account because of additions, abandonments, retirements, or other adjustments made by the Pennsylvania Railroad Company in connection with the road, equipment, and other parts of the leased premises.
(d) Approved advances by the Pennsylvania Railroad Company for the acquisition of right-of-way and for other purposes as required under the lease.
(e) Approved agreements entered into by the Pennsylvania Railroad Company which gave the Sanitary District of Chicago permission to construct, maintain and operate a sewer under plaintiff's property and an agreement likewise entered into by the Pennsylvania Railroad Company which granted to another railroad an easement over the property of one of plaintiff's sublessor companies.
All of the above actions were taken by plaintiff's board of directors as required under the lease agreement.
11. A complete set of books was maintained by plaintiff in which was recorded the various transactions affecting plaintiff as lessor, including transfers of property, additions to or reductions in the capital accounts, changes in its capital stock and bonded indebtedness accounts, dividend and interest accounts, and other accounts which would ordinarily appear in a railroad accounting system. All of the accounting and record work was performed by employees of the Pennsylvania Railroad Company in the offices of that company without the payment of any compensation therefor by plaintiff.
12. The following statement shows plaintiff's receipts and disbursements for the fiscal year ended June 30, 1938:
Receipts
Income from lease of road .......
$10,171,772.01
Proceeds sale of property .......
21,820.00
Proceeds sale of material .......
200.00
Pennsylvania Railroad Company advances account sinkingfund payment, Chicago Union Station Company bonds.................
89,750.00
Refund of assessment for improvement...................
9.38
Pennsylvania Railroad Company advances for construction..................
$70,836.80
Reimbursement of expenditures made for other roads..........
70,836.80
10,425,224.99
Disbursements
Interest on funded debt .........
$ 5,930,700.00
Stockholders dividend ...........
4,236,037.50
Pennsylvania Railroad Company account construction..
92,866.18
Maintenance of investment organization..................
5,295.63
Chicago Union Station Company, advances for sinkingfund payment 4% gold bonds.........................
89,750.00
Unclaimed wages .................
.40
Advances to other roads for construction..................
70,836.80
10,425,486.51
The item 'Income from lease of road, $10,171,772.01' shown under 'Receipts' is made up in large part of two items appearing under 'Disbursements,' namely, 'Interest on funded debt, $5,930.700.00' and 'Stockholders dividend, $4,236,037.50' funds for the payment of which were furnished by the Pennsylvania Railroad Company as rental under the terms of the lease. The other items likewise represent items arising by reason of the carrying out of the lease.
13. Plaintiff's balance sheets at the close of the fiscal years ended June 30, 1937, and June 30, 1938, showed total assets in the respective amounts of $311,133,169.47 and $309,346,581.19, a net decrease of $1,786,588.28, and the liabilities were shown in corresponding amounts with undivided profits in the respective amounts of $6,409,004.16 and $6,382,262.11. These balance sheets, with accompanying explanations for changes, are attached to the petition as Exhibit B and they are incorporated herein by reference. The two principal decreases in assets were a net reduction in book value of equipment resulting from retirements in excess of expenditures in the amount of $1,114,825.96 and a net book adjustment (reduction) of $4,917,270.73 in the construction account writing off the balance of items deferred during the years 1921 to 1936, inclusive, to cover interest on bonds which had been purchased and canceled in prior years. The decrease in liabilities resulted in large part from an item of $4,872,900.50 representing the net book adjustment in construction account to cover the interest on bonds just mentioned and an item of $455,302, representing depreciation charged off on equipment retired. Both the asset and liability accounts show substantial adjustments on account of depreciation.
The surplus reserves as of January 1, 1926, were $37,035,819 as compared with surplus reserves as of June 30, 1938, of $37,847,057, an increase of $811,238 over that period. That increase was attributable to donations received from individuals, companies, states and municipalities in connection with the construction of side tracks from the track of the leased railroad to a plant or other point designated by the party making the donation. No operating profit was involved in these donations. The undivided profits as of January 1, 1926, were $6,727,168 as compared with undivided profits as of June 30, 1938, of $6,382,262, a decrease of $334,906 over that period. This decrease was due for the most part to the cancellation of advances to the Chicago Union Station Company which had been made prior to the date of the lease.
14. On June 30, 1937, plaintiff owned securities of a par value of $5,111,400 and a book value of $3,068,397.11. There was no change in these securities during the fiscal year ended June 30, 1938, except for a minor change in book value due to instructions from the Interstate Commerce Commission. These securities were kept in the vaults of the Pennsylvania Railroad Company. The dividends and interest thereon were collected by plaintiff and turned over to the Pennsylvania Railroad Company, which included them in the latter's income account. There were no purchases or sales of stocks, bonds or other securities during the year ended June 30, 1938.
15. Under the terms of the lease agreement, funds for the payment of interest on plaintiff's outstanding obligations were furnished by the Pennsylvania Railroad Company as a part of the rental on the leased properties. As the interest became due from time to time during the year, a check was drawn by the Pennsylvania Railroad Company to the order of the plaintiff for the amount of such interest and the latter in turn indorsed it for the order of the former which paid the interest. On its books plaintiff was credited with the amount of this interest and, after disbursement by the Pennsylvania Railroad Company as disbursing agent, appropriate entries were made to record the payment of the interest. A substantial part of these obligations was held by parties other than the Pennsylvania Railroad Company and its affiliated companies. The total amount of interest paid during the fiscal year ended June 30, 1938, was $5,930,700, as shown in finding 12.
16. As shown in finding 12, the dividends paid by plaintiff to its stockholders for the fiscal year ended June 30, 1938, were in the amount of $4,236,037.50. Funds for the payment of these dividends were furnished by the Pennsylvania Railroad Company to plaintiff as part of the rental under the lease agreement which was accomplished by a book transaction whereby plaintiff was credited with cash in the amount of the dividends. In that year the Pennsylvania Railroad Company and its affiliated interests owned 99.4 percent of plaintiff's stock, 51.8 percent being registered in the name of the Pennsylvania Railroad Company, 4.9 percent in the name of the Managers of the Pennsylvania Railroad Company Trust Fund, and 42.7 percent in the name of the Pennsylvania Company. The balance of the stock, that is, 0.6 percent was owned by outside stockholders.
The dividends paid on account of stock in the name of the Pennsylvania Railroad Company were paid by drafts of plaintiff on the Treasurer of the Pennsylvania Railroad Company and totaled $2,193,017.50. Dividend payments on account of the Managers of the Pennsylvania Railroad Company Trust Fund, the Pennsylvania Company, and the outside stockholders were made through the Guaranty Trust Company of New York. The portion of the rental required to pay these latter dividends was transferred to the Guaranty Trust Company by plaintiff's draft and thereafter dividend checks were drawn on the treasurer of plaintiff through the Guaranty Trust Company.
The stock of the Pennsylvania Company, referred to above, is entirely owned by the Pennsylvania Railroad Company. The Pennsylvania Railroad Company Trust Fund, referred to above, was created by action of the directors of the Pennsylvania Railroad Company, approved by its stockholders, in 1878, and the assets held by the Managers of this Trust Fund are carried on the balance sheet of the Pennsylvania Railroad Company as assets of that company.
The Managers of the Pennsylvania Railroad Company Trust Fund and also the directors of the Pennsylvania Company are all directors or officers of the Pennsylvania Railroad Company. Dividend payments on these two accounts, including payments on account of qualifying shares of stock held by directors of plaintiff, totaled $2,017,185. The aggregate payment of dividends to outside individual stockholders, which held 0.6 percent of plaintiff's stock, was in the amount of $25,847.50, and that was paid through the account in the Guaranty Trust Company.
The account in the Guaranty Trust Company was the only bank account maintained by plaintiff, and it was maintained solely for the purpose of paying dividends. That method has since been discontinued. On July 1, 1937, there was a balance of $10 in the account, and on June 30, 1938, the balance was $22.50, in each case the balance representing undeposited dividend checks.
17. As required by the lease agreement and as heretofore shown, plaintiff maintained a corporate organization after the execution of the lease agreement and, as shown in finding 12, the cost of maintaining such organization during the fiscal year ended June 30, 1938, amounted to $5,295.63. That amount consisted of the following items: fees paid trustees under the several indentures of the plaintiff, $3,520.38; advertising and annual meetings of stockholders and sinking fund notices, $346.41; fees and expenses paid directors for attending board meetings, $1,200.52; amounts paid American Bank Note Company for numbering coupon bonds issued in exchange for registered bonds, $211.30; legal expenses in connection with satisfaction of mortgage, cost of printing annual reports, and other minor items, $17.02. Plaintiff paid these amounts from time to time and at six-month intervals the Pennsylvania Railroad Company reimbursed plaintiff therefor as required under the lease.
18. As shown in finding 3, plaintiff was organized for the purpose of operating the railway lines and business of five operating railroads, and did operate these railroads until January 1, 1921, the effective date of the lease agreement. From and after that date, including the period involved in this suit, the Pennsylvania Railroad Company carried out that primary purpose and plaintiff did not run any railway trains, sell any transportation, make any applications to the Interstate Commerce Commission for the establishment of freight or passenger rates, or otherwise engage in operating these railway lines. During that same period plaintiff was not in liquidation but remained in existence as required by the lease agreement and engaged in the activities required under the lease agreement and by reason of its corporate existence, which consisted of (a) the activities which the law required it to perform by reason of its corporate existence, (b) activities required by law by reason of the character of the demised properties, title to which remained in plaintiff, (c) activities carried out under the terms of the lease to enable the Pennsylvania Railroad Company to discharge its obligations in operating the railway lines, and (d) the receipt and distribution of income.
JONES, Chief Justice.
This case involves a federal capital stock tax for the taxable year ending June 30, 1938.
The question is whether plaintiff was carrying on or doing business within the meaning of Section 601 of the Revenue Act of 1938, 52 Stat. 447, 26 U.S.C.A.Int.Rev. Acts, page 1139, during any part of such year.
Subdivision (a) of Section 601 is as follows: '(a) For each year ending June 30, beginning with the year ending June 30, 1938, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.'
The essential facts are set out in the findings.
The plaintiff filed a capital stock tax return for the year in question, declaring the value of its capital stock to be $84,860,000. It claimed exemption from such tax upon the basis of an accompanying affidavit, which set out various facts in respect to the organization, operation and status of the corporation during the period involved.
The Commissioner of Internal Revenue denied the claim for exemption, and accordingly levied an additional assessment in the sum of $84,860, plus statutory interest, which was paid on November 16, 1939, in the total sum of $91,065.23. A timely claim for refund was rejected, and plaintiff seeks a recovery of this amount.
Plaintiff was organized under a merger agreement of five existing railway corporations in the year 1916 for the purpose of operating and until January 1, 1921, did operate as one railway the consolidated lines approximately 2,000 miles in length.
In the early part of 1921 the plaintiff and the Pennsylvania Railroad Company entered into a lease agreement. By the terms of the agreement plaintiff leased to the Pennsylvania Railroad Company all its property, rights, privileges and franchises for a term of 999 years, with a proviso that 'nothing herein contained shall operate to grant or demise the franchise to be a corporation possessed by the Lessor, or any other right, privilege or franchise which is or may be necessary to fully preserve the corporate existence or organization of the Lessor.'
The Pennsylvania Railroad Company agreed to pay plaintiff (a) a fixed annual rental; (b) a sufficient sum each year to pay the interest and sinking fund obligations upon lessor's bonded or other indebtedness and upon any later bonds which might be issued with lessee's approval; and (c) a sufficient sum to enable plaintiff to maintain its corporate organization, including reasonable organization, administration and legal expenses. The lessee was to pay all taxes and assessments levied against the property, all amounts required under plaintiff's leases with certain sublessor companies, and all claims arising out of the operation of the leased properties.
The lessee was to keep the demised equipment and premises in thorough repair, working order and condition, so that the business of the demised railroad would be preserved and developed and further growth of such business provided for. It was provided that any real and personal property of the lessor which in the opinion of the lessee was not necessary to the continued and prospective use of the leased railroads might with the consent of the lessor, evidenced by a resolution of its board of directors, be sold from time to time by the lessee, who agreed to receive the proceeds of any sale and apply the same, with due regard to any mortgages thereon, to betterments or improvements upon or additions to the leased railroads and property of the lessor. The lessee agreed to furnish the money for improvements, building, equipment and facilities, but the cost of such improvements was to constitute an indebtedness of the lessor. It was further provided that the lease should terminate upon the failure of the lessee to pay the agreed rent or any part thereof if such default continued for thirty days, and that the lease would likewise terminate upon the failure of the lessee to keep any of the other covenants and agreements, if such default continued for ninety days after notice thereof given in writing by the lessor.
The lease has been in effect since its execution. Both parties have at all times complied with its terms.
Plaintiff maintained its principal office at Philadelphia, Pennsylvania, and other offices in some four different states. These offices were located in the offices of the Pennsylvania Railroad, and all work performed by employees of the Pennsylvania Railroad without compensation from plaintiff. The plaintiff at all times had a full complement of officers, such as are ordinarily had by railroad companies, including president, vice presidents, secretary, assistant secretary, treasurer and assistant treasurer. The individuals who held these offices held the same offices with the Pennsylvania Railroad, with one or two exceptions. Plaintiff had fifteen directors, of whom ten were also directors of the Pennsylvania Railroad. Except for the officers and directors, plaintiff had no employees and paid no salaries, all the work of plaintiff being performed by the officers and employees of the Pennsylvania Railroad Company.
During the fiscal year ending June 30, 1938, plaintiff's stockholders had one meeting, and its board of directors had four meetings. The only business transacted at the stockholders' meeting was the approval of the annual report of its president and board of directors, and the election of a board of directors. At the directors' meetings business was transacted as follows:
(a) Approved reports of sales of real estate involving consideration of not to exceed $10,000 in any one sale, made in accord with a resolution of plaintiff's board of directors theretofore passed authorizing the president or vice president of plaintiff company to approve sales of real estate not exceeding $10,000 in value upon such terms and for such consideration as in the judgment of the president and vice president were just and reasonable, and to execute such deeds and instruments in connection therewith as might be necessary, without further action by the board; (b) Approved expenditures for additions, betterments and improvements made by the Pennsylvania Railroad Company; (c) Approved charges and credits to plaintiff's capital account because of additions, abandonments, retirements or other adjustments in connection with the road, equipment, and other parts of the leased premises; (d) Approved advances by the Pennsylvania Railroad Company for the acquisition of right-of-way and for other purposes as required under the lease; (e) Approved agreements entered into by the Pennsylvania Railroad Company which gave the Sanitary District of Chicago permission to construct, maintain and operate a sewer under plaintiff's property, and also an easement given by the lessee.
A complete set of books was maintained by plaintiff, in which was recorded the various transactions affecting plaintiff as lessor, including transfers of property, additions to or reductions in the capital accounts, changes in capital stock and bonded indebtedness, dividend and interest accounts and other accounts which ordinarily appear in a railroad accounting system.
After January 1, 1921, plaintiff did not run any railroad train, sell any transportation, make any applications to the Interstate Commerce Commission for the establishment of freight or passenger rates or otherwise engage in operating these railway lines. Plaintiff was not in liquidation, but remained in existence as required by the lease agreement and engaged in the activities required under the lease agreement and by reason of its corporate existence. The plaintiff insists it was not doing business within the meaning of the taxing statute. It cites a number of cases, including McCoach v. Minehill and Schuylkill Haven R. R. Co., 228 U.S. 295, 33 S.Ct. 419, 57 L.Ed. 842; North Pennsylvania R. Co. v. Rothensies, D. C., 45 F.Supp. 486; Mahoning Coal R. Co. v. Higgins, D. C., 57 F.Supp. 717.
The defendant insists that the activities of the lessor constituted doing business within the meaning of the statute, and cites numerous cases, including Edgar Estates Corporation v. United States, 65 Ct.Cl. 415, 422; Flint v. Stone Tracy Co., 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed. 389, Ann.Cas.1912B; Wisconsin Cent. R. Co. v. United States, 41 F.2d 870, 70 Ct.Cl. 203, 231.
It is not necessary to discuss in detail these and other cases cited by the respective parties.
The upshot of these decisions is that each case must stand on its own bottom; that no particular volume of business is necessary and that each case must be decided separately upon the basis of whether the facts of the case constitute carrying on or doing business within the meaning of the statute.
The plaintiff relies largely upon the decision of the Supreme Court in the Minehill case, supra. The facts in that case are in some respects similar to the facts in the case at bar. Both cases involve the capital stock tax levied upon the lessor company in connection with leased premises and facilities and the operation of the leased railway. In the Minehill case the plaintiff was held not subject to the capital stock tax. However, in the decision in that case the court uses the following language, 228 U.S. at page 305, 33 S.Ct. at page 423, 57 L.Ed. 842: '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.'
It will be seen then that by express language the court narrowed and limited the effect of its decision.
Was the lessor merely a 'shell corporation' or was it doing business?
The question is somewhat difficult, but when the entire record is considered we have concluded that plaintiff was doing business within the meaning of the statute.
As a general rule a corporation of the type involved here is exempt if its activities are limited to owning and holding property, collecting the income therefrom and distributing it. Von Baumbach v. Sargent Land Co., 242 U.S. 503, 517, 37 S.Ct. 201, 61 L.Ed. 460.
The lessor's activities were substantially more than this.
Plaintiff was not only required to maintain a corporation but to exercise its powers in aid of the business of the lessee. It maintained its own board of directors which had four meetings during the year involved. Its approval in writing was required by the terms of the lease before a sale of any of the property could be made by the lessee. This required some discretion in protecting the rights of the respective corporations. It approved expenditures for additions, betterments and improvements to the leased properties. It approved charges and credits to plaintiff's capital accounts made necessary by additions, abandonments and retirements. It approved advances for the acquisition of right-of-way. It approved agreements permitting the Chicago District to construct and maintain sanitary improvements, and the granting of an easement for other purposes. It might with the approval of the lessee acquire other lines of railway to come under the lease.
There were two forfeiture provisions, (1) default, on the part of lessee, in the payment of rent for a period of thirty days, and (2) failure on the part of the lessee to keep and perform any of the covenants and agreements contained in the lease for a period of ninety days. The instrument of lease provided that 'in either and every such case, it shall be lawful for the Lessor, its successors or assigns, at its or their own option, to declare this lease forfeited and ended, and thereupon to enter into and upon the railroads and premises hereby demised, and any and every part thereof, and remove all persons therefrom; and thereupon and from thenceforth, the said railroads and property hereby demised, with all appurtenances thereof, and all additions and improvements which shall have been made to the same, shall revert to the Lessor, to have, hold, possess and enjoy as of its first or former estate therein, as fully and completely, in all respects, as if this lease had not been made; and upon such entry for nonpayment of rent or breach or nonperformance of any covenant or agreement herein contained to be by the Lessee observed or performed, all the estate, right, title, interest, property, possession, claim and demand whatsoever of the Lessee, its successors or assigns, in or to the said railroads and property, or any part thereof, shall absolutely cease, terminate and become and be void and wholly extinguished, anything hereinbefore contained to the contrary in anywise notwithstanding.'
Certainly the requirements of the second forfeiture provision necessitated constant vigilance on the part of lessor's officers if the rights of plaintiff's stockholders were to be fully protected.
True, ten of the fifteen directors of the lessor corporation were also directors of the Pennsylvania Company, but five of them were not. It is also true that the vast majority of the stock of the lessor was owned by the lessee, but a part of it was not, and it was necessary that the rights of the minority stockholders be preserved.
These duties were not perfunctory. It seems axiomatic that if the lessor directors had paid no attention to how the lessee was caring for lessor's properties and had permitted the lessee company to dispose of lessor's property which lessee regarded as unnecessary without regard to its price or value, the minority stockholders might have had a basis for action to protect their rights.
There must be a reason for wanting to maintain two corporations over the long lease period. Naturally income taxes would be affected by the disposition of property owned by the lessor company as well as by replacement and discarding of old properties.
The capital tax levy is comparatively small. It is levied on the privilege of doing business. We are unable to escape the conclusion that plaintiff in the peculiar circumstances of this case was doing business under the broad terms of the capital stock statute. The petition is dismissed.
It is so ordered.
HOWELL, MADDEN, WHITAKER, and LITTLETON, JJ., concur.