| S.D.N.Y. | Jun 11, 1921
The plaintiff seeks to recover income taxes paid under duress, and the defendant demurs to the complaint. The Cuba Railroad Company built one of its railroad lines under an agreement with the Cuban government authorized by an act of the Congress of that government that it would reduce by one-third its charges for government transportation, would transfer troops in case of war at a reduced rate, and would reduce passengers’ fares over its lines, and that after the completion of the railroad the government would pay the plaintiff at the rate of $5,000 per kilometer in six annual installments. The railroad built another line under a contract with the Cuban government, whereby it was to receive $6,000 per kilometer, to be paid as the work progressed, in six annual installments, and was to transport mails free of charge, transport minor fruits at half rátes, and permit the government to maintain telegraph and telephone lines on its right of way.
' The lines of railroad were completed and annual payments were made to the plaintiff by the Cuban government, on which an income tax was claimed to be due for the years 1911 to 1916, inclusive. This tax was paid under protest, and amounted to $20,239.18. A further income tax of $13,685.14 was paid by the railroad, and afterwards returned by the United States government, because of a miscalculation of the rate, and accepted by the railroad. The plaintiff now seeks to recover back the sum of $20,239.18, with interest, and also interest between the date of payment and the date of return on $13,685.14.
The fixing of rates is certainly a common provision in government contracts granting railroad franchises, and the real consideration for the payment of‘the subsidy was the agreement to build the road aiid. operate it. For that agreement a franchise to operate it on prescribed terms and a subsidy payable in six annual installments was granted. Suppose a subscriber for stock agreed to pay in his subscription in six annual installments after a railroad was completed. The subscriber’9 return would consist of. a chance to receive dividends in the future. The government’s return in this case was to be secured by the development of the island through the construction and operation of the railroad, the privilege on the part of the government of placing “telegraph and telephone wires on the right of way, and of securing the carriage of mails and passengers, produce, and troops upon prescribed terms.
The English cases, where annual contributions were made to assist in paying interest charges on construction bonds, are not in point. Such subsidies have been fairly held to be income, because they were intended to relieve the companies from annual charges against income. So far as annual subsidies were required to be used to form a sinking fund to amortize obligations incurred in construction, I think the English decisions are of doubtful correctness. They are defended in respect to the items to be applied toward a sinking fund upon the ground that the whole sum making up the annual subsidy was paid as income, and that the appropriation of a portion of it to a sinking fund after receipt by the company did not alter its original character. The court said in the case of Blake v. Imperial Brazilian Ry., Great Britain Reports of Income Tax Cases (1884) vol. 2, p. 58:
“When once the thing is ascertained as being subject to income tax, it matters not what is done with it afterwards. When once it has come within the grasp of the income tax acts, it is liable to income tax, whatever may be its destination, or whatever use it may be put to.” ' '
Whether the above reasoning be sound or not, no such situation confronts us here, for the payments are not derived from capital and labor, and are not to relieve annual interest charges against capital, but are contributions made within a .short period to pay the railroad for constructing its lines and agreeing to run them on prescribed terms. I cannot see how the subsidies are income in any practical business sense.
The demurrer is overruled.