Summary
In Brainard v. New York Central R.R. Co., 242 N.Y. 125, 151 N.E. 152, 154, 45 A.L.R. 751, the court said that: "Unless the lease expressly provides for the payment of taxes on the income from rentals received under the lease, the imposition of such a burden on the lessee is not justified.
Summary of this case from United States v. Warren R. Co.Opinion
Argued January 18, 1926
Decided February 24, 1926
Appeal from the Supreme Court, Appellate Division, First Department.
Nathan L. Miller, Frederick L. Wheeler, Crosby J. Beakes, Alexander S. Lyman and Charles C. Paulding for appellants. Charles I. Taylor and Thomas H. Beardsley for respondents.
Minority stockholders of the Mahoning Coal Railroad Company bring this derivative action to recover on behalf of their company from the New York Central Railroad Company as successor of the Lake Shore Company an installment of Federal income and excess profits taxes assessed against and paid by Mahoning Company for the year 1920, amounting to $480,425.20.
The Mahoning Company is a railroad corporation of Ohio with an outstanding capital stock of $2,161,367, consisting of $1,500,000 par value of common, and $661,367 par value of preferred, of which capital stock the Central Company is the owner of $894,650 par value of the common, and $419,150 par value of the preferred.
On December 4, 1871, the Mahoning Company being about to construct its road, entered into a traffic agreement with the Lake Shore Company providing for trackage rights by the Mahoning Company over the Ashtabula branch of the Lake Shore Company, for fair treatment by each road in handling the traffic to or from the road of the other, for the divisions between the parties as to the joint traffic and for the assistance by the Lake Shore Company in the marketing of the bonds of the Mahoning Company by annual application of forty per cent of the revenues of the Lake Shore Company from the joint traffic to the purchase of such bonds if obtainable at par or less.
On May 1, 1873, the Mahoning Company having completed its road and being without equipment to operate it, entered into a supplemental agreement with the Lake Shore Company under which the Lake Shore Company was to manage, maintain and operate the road of the Mahoning Company for twenty-five years (subject to the right of the Mahoning Company to terminate after five years) and share the gross earnings with the Mahoning Company on the basis of forty per cent to the Mahoning Company and sixty per cent to the Lake Shore Company.
On July 1, 1884, a further agreement (the one here involved) was entered into between the Mahoning Company and the Lake Shore Company under which the prior agreements were canceled and the Lake Shore Company was to continue to work, maintain and operate the road and property of the Mahoning Company, of which it was in possession under the prior agreement in perpetuity and share the gross earnings with the Mahoning Company on the basis of forty per cent to the Mahoning Company and sixty per cent to the Lake Shore Company. The Central took over the agreement as a part of the consolidation agreement with the Lake Shore in 1914.
The question is as to the construction of the covenant as to taxes contained in this agreement of July 1, 1884, which reads as follows: "That it [Lake Shore Company] will in due season pay all taxes and assessments which may be levied or become chargeable on the said road or property, or upon the said Mahoning Company, by reason of its ownership thereof." Prior to the tax in suit the New York Central had been paying these taxes.
As under the agreement of 1884 the Central Company bears the cost of maintenance and operation and of taxes on the road and property, the forty per cent share of the gross income received by the Mahoning Company is free of all such charges, and the plaintiffs now contend that in addition to the charges so paid, the Central Company should also so pay the personal income taxes of the Mahoning Company both on its shares of the gross income so received and on its other income as well.
The Appellate Division, first department, affirmed the judgment of the Special Term without opinion. The court at Special Term was of the opinion that it was the intent of the parties to the agreement of 1884 that the "lessee" should pay every tax of every name and description and that as the "lessor" derives its entire income from the forty per cent of the gross earnings of its road and from certain interest returns upon such earnings and the investment thereof, all its taxes result directly or indirectly by reason of its ownership of its road, and whether or not as an original question the Federal income tax would be technically chargeable upon the "lessor" company by reason of its ownership of its road and property that every doubt as to the intent and meaning of the parties had been entirely dispelled and the proper interpretation of the "lease" conclusively established by the practical, uniform and continuous construction placed upon the "lease" by the parties themselves.
The defendant Central Company contends that the court at Special Term was in error in its conclusions for the reason that:
(1) The tax clause in question does not admit of the construction placed upon it by the lower courts; but on the contrary, it is clear and definite in its meaning and is so limited as to negative the intent that the operating company should pay the personal income taxes of the owning company.
(2) The tax clause being clear and definite, there is no ground for applying the rule of practical construction.
In actions based on leases and working agreements like the one in question (which for convenience may be called a lease), where the lessee agrees to pay all taxes levied and assessed on or in respect to the property, the distinction between taxes on the income of property and taxes on the property itself has been repeatedly pointed out. With monotonous frequency the courts have held in this connection that a tax on the rents or income of real property is not considered a tax on the property itself. When the lessee is to pay all taxes, ordinary and extraordinary which shall be imposed on the demised premises or "in respect thereof," the tax on rents is a tax not in relation to the property demised but in relation to the income thereof. ( Woodruff v. Oswego Starch Factory, 177 N.Y. 23.)
The literal words used in the contract before us have not been the subject of judicial construction and it is urged that they have some weighty and special significance indicative of the foresight of the parties in 1884 when income taxes were not in their direct contemplation. What is meant by taxes assessed upon the Mahoning Company "by reason of its ownership" of the leased property? Do these words differ so essentially from the words "on" or "for" or "in respect of" leased premises as to call for another interpretation? The words chosen by the parties should not be unnaturally forced beyond their ordinary meaning. ( Codman v. American Piano Co., 229 Mass. 285.) The operating company pays the taxes incidental to operation. It turns over forty per cent of the gross earnings to the Mahoning Company. Doubtless the Mahoning Company would have no income tax to pay if it did not own the property but ownership taxes and income taxes have been so clearly separated that the rule has been recently formulated in these words: "Unless the lease expressly provides for the payment of taxes on the income from rentals received under the lease, the imposition of such a burden on the lessee is not justified." ( Ills. Cent. R. Co. v. Ind. Union Ry. Co., and cases cited, 6 Fed. Rep. [2d S.] 830, 837.) The rule has the merit of reasonableness and certainty and we do not hesitate to adopt it. If more is desired, the language may easily be made sufficiently comprehensive. In Suter v. Jordan Marsh Co. ( 225 Mass. 34) the lessee agreed to pay all taxes levied "upon or in respect of" the rent. This covered the income tax. The words "taxes by reason of ownership" have a special significance and do not suggest income taxes. In Thomas v. Cincinnati, etc., Ry. Co. (93 Fed. Rep. 587) the question was as to a franchise tax. It was held that a franchise tax was a tax imposed "by reason of the ownership" of the leased railroad. The lease specifically covered taxes on income.
The Canadian case of New Brunswick Canada R.R. Co. v. N.B. Ry. Co. (4 D.L.R. [1924] 962) suggests the force to be given to the words "by reason of the ownership." ANGLIN, J., speaking of taxes assessed upon the owner railroad said that the burden included "all charges in the nature of taxation levied upon the demised property itself, and possibly, in addition, such as may be assessed upon the lessor qua owner of the property" and did not include income taxes. What was there left to inference is here made plain. It should not escape notice that in Ohio taxes due upon land are a personal debt of him in whose name the lands stand listed, as well as a lien upon the lands. In the words of HISCOCK, J., in the Appellate Division in the Woodruff Case ( supra) ( 70 App. Div. 481, at p. 485): "The tax here indicated is one which is directed specifically against the property which is demised or against the lessors in respect of, or on account of, such property."
We are construing an agreement; not determining the constitutionality of a taxing statute. In Pollock v. Farmers L. T. Co. ( 157 U.S. 429) it was held that a tax on rents or income received from real estate was a tax on real estate. Obviously this was no ruling on the distinct question whether a tax on rent was a tax assessed on land or by reason of the ownership thereof. The distinction is pointed out in the Woodruff Case ( supra) (177 N.Y. at p. 29) where the court said: "A tax upon rents may, doubtless, be regarded, in legal theory, as a tax upon the land; but, while as a general proposition that may be true, it has no influence upon the question here," i.e., the question of the liability of the lessee to pay the taxes on the rents. It follows that the language of the agreement is not sufficiently broad to cover taxes upon the payments to be made thereunder; that it is broad enough to cover the personal liability of the Mahoning Company for taxes on the tangible property; and that income taxes are not, in the legal significance of the words used, imposed upon the Mahoning Company "by reason of ownership" of the property.
But it is urged that the triers of fact have conclusively fixed another sense in which the words were used in the contract before us as based on the intention of the parties and the practical construction given by them to the language of the lease. The construction of a plain contract is for the court. The intention of the parties is found in the language used to express such intention. ( Hartigan v. Casualty Co., 227 N.Y. 175.) If the court finds as matter of law that the contract is unambiguous, evidence of the intention and acts of the parties plays no part in the decision of the case. Plain and unambiguous words, undisputed facts, leave no question of construction except for the court. The conduct of the parties may fix a meaning to words of doubtful import. It may not change the terms of a contract.
The payments made by the Central were made either through inadvertence or by reason of failure properly to construe the language of the contract. The Mahoning Company has not been led to act to its disadvantage in any regard. The position of the parties has not been altered. When the instrument is clear in the eye of the law the error of the parties cannot control its effect. The mere fact that the landlord chooses to relieve a tenant of a duty tends in no way to create a duty not imposed by the contract. ( Elefante v. Pizitz, 182 App. Div. 819, 822; affd., 230 N.Y. 567.) The court stands on the written agreement. Facts found and unanimously affirmed which tend to alter its effect are no part of the decision.
The judgments should be reversed and the complaint dismissed, with costs in all courts.
HISCOCK, Ch. J., McLAUGHLIN, CRANE, ANDREWS and LEHMAN, JJ., concur; CARDOZO, J., absent.
Judgments reversed, etc.