UNITED STATES V. LOUISVILLE & N. R. CO.
jng, linen thread that may also be used for that purpose. Upon the whole case I am forced to the conclusion, though not without some hesitation and doubt, that the term "gilling twine," in the second paragraph, means twine that is made and used for gilling,-such as salmon twine,-and does not mean linen thread, although one of the minor uses of the latter is for gilling; and that the ruling of the collector was right. Judgment for the defendant.
UNITED STATESV. LOUISVILLE
& N. R. Co.
(Oircuit Court, D. Kentucky. January 24, 1888.)
INTERNAL REVENUE-TAXATION OF RAILROADS-AcT OF
1870. The act of congress of July 14. 1870, relating to the taxation of railroad bonds, was part of the general system of income taxation. and fixed a time When tI),at system should expire; and. in taxing the interest on such bonds as part of the corporate earnings. it applies only to interest actually paid. not to interest merely payable.
Where two railway companies consolidate, one assuming the debts of the ,other, this is apayment of such debts. as between such corporations, but is presumably not a payment from the "earnings" of the debtor. within the meaning of those internal revenue .laws which provide for taxing corporate incomes.
At Law. On demurrer. 'J. C" Wichliffe, U. S. Dist. Atty. and for plaintiff. . H. W. Bruce, for defendap.t.
C. Bell, Asst. Dist. Atty.,
BARR, J. The plaintiff has sued the defendant to recover certain faxes which it is alleged are d_oe upon the interest paid on certain coupon mortgage bonds issued by the Memphis & Ohio Railroad Oompany. These bonds,are alleged to have amounted to $732,000, and were held by the Louisville & Nashville Railroad Company, and were paid by said company in .an arrangement made October 9, 1872, by whicl1, among other things, the two railroad companies were consolidated, and, the Louisville & Nashville Railroad Company assumed to pay all the indebtenness of the Memphis & Ohio Railroad Company, and did, as of that day, (October 9, 1872,) pay said $732,000 of bonds held by defendant, by assuming the payment of same under the terms of said article of consolidation. The petition, as amended, alleges that the interest which accrued on said mortgage bonds from December 31, 1863,toJuly 1, 1864, amounted to $36,600, and the tax thereon, at 3 per centum, was $1,098; and the interest which accrued on said bonds from July 1, 18!34, to July 13,_1866, amounted to $146,400. and the tax thereon, at per centum, was $7 ,320; and interest which accrued on said bonds from July 13, 1866, to August 1,1870, amounted. to $298,900, and the
at 5 per centum, to'$4,945; and the interest which accrued ot!.:sl1id Londs from August 1, ',1$70-; to December 31. 1871, amounted 'and the tax theredni:at2i percentuni, to $2,592. All of fthis' ifitt;lrest is alleged to havebeen paid' by the defendant in the consoltilJ/ttihll'wlliCll was consummated on the 9th day of October, 1872. The uiiti's:(jHHi$ consolidation aresMwn by a copy of the agreement, which which is dated 15th of February, 1871, and proVides that the Memphis & Ohio Railroad Company was to be consolidated with the Louisville & Nashville Railroad under the corporate name of the Louisville & Nashville Railroad Company; that the Louisville & Nashville Railroad Company assumed and wa,s to pay all of the debts of the Memphis & Ohio Railroad Company, and exchange one share ot its stock (Louisville & Nashville) for four shares of the Memphis & Ohio Railroad stock, and the said company (Memphis & Ohio) was to issue, payable to the Louisville & Nashville Railroad Company, their three million and a half of coupon bonds, secured. by a mortgage on the road and all.other property of the Memphis & Ohio Railroad Company. The defendant has demurred to the petition as amended, and contends-Firat, that this arrangement by' which the two roads became one, and the debt which the Louisville & Nashville Railroad Company held against the Memphis & Ohio railroad Company was discharged, was not in fact a payment of the interest, within the meaning of the internal revenue laws; second, if it was a payment of said interest, within the meaning of said laws, no tax is due thereon, because, at the time of said payment, these laws had ceased to exist, and there was no tax due thereon; third, that if it be concedEld the old laws were stillin force for the purpose of levying and collecting the income tax upon "this interest, when paid, it cannot be leviable on account of this interest. because it was not paid out of the earnings or income of the Memphis & Ohio Railroad Company, and there is no allegation in the petition to that effect. The consolidation the two roads under the arrangement discharged the debt which the Louisville & Nashville Railroad Company held against the Memphis & Ohio Railroad Compahy, principal and interest. It was a payment, therefore, but, presumably, not from the earnings or profits 6f the Memphis & Ohio Railroad, or of that company. It would seem probable, from the terms of the consolidation, that the three and a half millions of mortgage bonds which were to be issued to the Louisville & Nashville Railroad Company were to be used, and were in fact used, to discharge the debts of the Memphis & Ohio Railroad Company, includ;' ing thosl;lheld by the Louisville & Nashville Railroad Company. The other contenti911s of the defendant will be .considered together. The 81st section of the act approved July 1, 1862, required that the interest on bonds issued by railroads "shall be subject to and pay a duty of three per centum on the amount of all' such interest or coupons * * · whenever the same shall>be paid." 12 St. 469. The 122d section of the act approved June 30,1864, required that interest on railroad bonds running one Or1lloreyears "shall be subject to and pay a duty of five per centum' on the amount of all such interest or coupons * * *
UNITED STA,TES V. LOUISVILLE & N. R. CO.
whenever the same shall be payable." 13 St. 285. The act of 1862 is repealed by this act, but the 173d section provides that all the provisions of said act "shall be in force for levying and collecting all taxes * * properly assessed, or liable to be assessed, or accming under the, or former acts, * * * the right to which has already accrued, or'which may hereafter accrue." The actof July 13, 1866, amended section 122 of theadt,approved June 30,1864, by adding this ' , "Provided. that whenever any of the companies mentioned in this section shall unnble to pay the interest on their indebtedness, and shall in fact fail to pay such interest, that in sueh cases the tax levied by this section shall not, be paid to the United States until said company resilmethe payment of interest on their indebtedness." The fifteenth section of the act approved July 14,1870, enacts: "There shall he levied and collected for and during the year 1871 a tax of two and one-half per centtlm on the amount of all interest or coupons paid more on bonds or other evidences of debt issued and payable in one years after date by any of the corporations in this section hereinafter enumerated;"and railroad companies are thereafter enumerated.Seetion 17 of sawe, act provided that section 122 of the act of 1864 the taxes therein mentioned to the 1st, day of gust, 1870, but after that date no further taxes shall be levied or asses!led under said seytion. 16 St., pp.260, 261, § 17. The same section, bowever, provides that "this act shall not be construed to affect any act donlil, Ijght accrued, or penalty, incurred under former acts, but every such right is hereby sa\red." It will be seen, from these qnotations, that the acts of 1862 and act of 1864, as amended by the act of 1866, make , stibstantialiy the same provision as to the time when the tax shall be paid. The act of 1864providl;lsthat this tax shall be due whenevedhe interest is pQ,yablej but the act of 1866 amends this, and makes the tax due whenever the interest is paid. This is the act of 1862. The earlier to have construed this as a tax on the bondholders, and recases garded the,proyisions as to the payment by railroad and other companies as merely a ,convenient mode of collecting the tax. U. 8. v. Railroad 00., 17 Wall. 325; Ra,ilroad Co. v. Jacks(m, 7 Wall. 262; Haight v. Rauroad 00., 6 Wall. 17. But the later cases ofthe supreme court have distinctly decidecl.thi13 tax to be upon the business of the companies. The court say, in Railroad Co. v. Collector, 100 U. S. 598: "The tax, in our opinion, is essentially an excise on the business of the class of corporations mentioned in the statute. The section is a part of the system of taXing incomes, earnings, and profits. adopted during the late war, and abandoned as soon after that war was ended as it could be done safely. The corporationslllentioned in this section are those engaged in furnishing roadways and water-ways forthe transportation of persons and property, and the manifest purpose of the law was to levy the tax on the net earnings of such companies." "How these earnings, profits, incomes, or gains to be most certainly ascertained? In every well-conducted cQrporation of this character their 'profits were disposed of in one of four methods, namely, distributed to its 'stockholders asdividends, used in construction of its roads or canals, paid out for interest· on its funded debts, or carried to a reserve or other