
    The People of the State of New York ex rel. Interborough Rapid Transit Company, Relator, v. Clark Williams, as Comptroller of the State of New York, Respondent.
    Third Department,
    May 4, 1910.
    Tax— corporation — franchise tax — railroad — underground railroad leasing elevated road.
    The mere fact that an underground railroad may run for a short distance upon the surface and for another short distance upon an elevated structure does not make it a surface or elevated railroad' for the purposes of taxation.
    Where an underground railroad exempt from taxation as respects the operation of its subway leases an elevated railroad, it is liable to pay a tax of one per cent of its gross earnings, including the earnings of the subway, under section 185 of the Tax Law providing that a company operating an elevated railroad. shall pay a tax of one per cent of its gross earnings from all- sources within, the State.
    The tax is not upon earnings or property, hut is for the privilege of exercising a corporate existence in carrying on the business; the earnings are used simply to determine what the franchise is worth.
    But excess dividends declared by the relator on its own stock cannot be. taxed where it appears that it has none of its capital stock “employed” in the operation of the leased, road.
    Smith, P. J., and Sewell, J., dissented, with opinion.
    Certiorari issued out- of the Supreme Court and attested on the 11th day of December, 1909, directed' to Clark Williams, as Comptroller' of the State-of New York, commanding him to certify and return to the office of the clerk of the county of Albany all and singular his proceedings had in denying the application of the relator for a revision of the amount of its franchise taxunder section 185 of the Tax Law for the years ending June 30, 1907, 1908 and 1909. (See Gen. Laws, chap. 24 [Laws of 1896, chap. 908], § 185, as amd. by Laws of 1906, chap. 474; revised into Consol. Laws, chap. 60 [Laws of 1909, chap. 62], § 185.)
    The relator operates the elevated railroads of the Manhattan Bail-way Company under a lease, the terms'"of which do not otherwise appear. The tax imposed against that company is not questioned; the only question here is whether the relator is' liable to pay the tax of one per centum on its earnings outside of the Manhattan elevated railroad and the three per centum upon the excess dividends upon its own stock.
    
      James L. QuaeJcenbush [Ralph Norton of counsel], for the relator.
    
      Edward R. O'Motley, Attorney- General [Edward II. Letohworth, Deputy, of counsel], for the respondent.
   Kellogg, J.:

The statute in question imposes this tax only on elevated railroads, or surface railroads not operated by steam.. The mere fact that an underground railroad for á short distance may run upon the surface, and for another short distance upon an elevated structure, does not make it a surface or elevated railroad. Its distinctive character is an underground railroad. It is not, therefore, taxable under this statute. The relator is exempt from taxation in respect to anything it does pursuant to the contract with the city under which the subway was constructed . and is operated. (People ex rel. Interborough Rapid Transit Co. v. Tax Comrs., 126 App. Div. 610; affd., 195 N. Y. 618.)

The statutory exemption should be given a fair construction in order to carry out the real purpose for which it was allowed, The exemption from taxation was an inducement which led to the construction and operation of the subway, and should be fairly observed.

It follows, therefore, that aside from the fact that the relator is operating the Manhattan elevated railroad as lessee, it would not be subject to this tax. The statute provides that the tax against the owning or operating company shall be one per centum upon its gross earnings from all sources within the State. The petition shows that the relator is operating the elevated railroads of the Manhattan Company, and the gross earnings of the relator are, therefore, made up of its earnings from its subway and from the Manhattan elevated roads.

This tax is not upon earnings or property, but is for the privilegé of exercising a corporate franchise in carrying on the business. The fact that the relator, with reference to the subway, is exempt from taxation except as to the real estate owned or employed by it,, doesnot • permit us, in ascertaining the gross earnings of the' company from all sources, to eliminate the earnings of the subway. The earnings are used simply as a method of determining what the use of the franchise is worth; a measure merely to determine how much tax' should be paid upon the franchise; Earnings from patents, United States bonds or other property expressly • exempt from, taxation are not to be excluded in determining the amount of the earnings of a corporation which is to be used in fixing the value of its franchise. (People ex rel. United States A. P. P. Co. v. Knight, 174 N. Y. 475, 482.)

The gross earnings of the relator from all sources within the. State must- be taken into account in computing this tax.

The tax upon the surplus dividends is upon the actual amount of paid-up capital employed ” by xthe corporation. This means-employed by the corporation in the ownership or operation of the road. We assume from the record that "the elevated roads are operated under their own charter, and the relator, - as lessee, is only interested financially in the net earnings.of that corporation after paying the interest upon its bonds and the rental to be paid. A ta.x'is imposed by.this section upon the excess dividends.of such leased corporation. It is not probable that the Legislature intended by this provision that the lessor company must pay a tax upon its excess dividends for the privilege of operating its railroad, and that the lessee company must pay a tax upon its excess dividends for the privilege of operating the road as lessee, thus making á double taxation. The first part of the section expressly declares .that the gross earnings from all sources shall be- considered, showing that not only the earnings of the lessee should be computed, but all' earnings of the operating, company. The latter part of the section omits the general words, and by the use of the word “employed” makes it clear that the excess of dividends is to be considered, so far as the lessee is concerned, only upon the amount of its capital stock, if any, employed in the business. It does not appear that any of the capital stock of the relator is employed in the operation of the elevated road ; on the contrary, we infer from the record that the relator receives from the operation of that road more than all it pays on account thereof, so that the lease is a profit to it.

The Tax Law of 1896 first made a company operating an elevated or surface road not operated by steam subject to this tax, and eight years thereafter, in 1903, the relator voluntarily, and for its own profit, took the lease of the elevated railroads of the ■ Manhattan Elevated . Bail way Company, and has since continuously operated them. Immunity from taxation is given to the relator with reference to its subway and its operation thereof, and such immunity is a property right. But when it voluntarily, for its own profit, took the lease of the other railroads and operated them, it made itself subject to any liability for taxation which any other lessee would have incurred by reason of such lease and operation. By taking the lease and operating the leased roads it voluntarily subjected itself to a tax with reference thereto, in computing which tax its earnings “ from all sources ” may be considered. The terms of the lease do not appear, but the petition admits that the relator has continuously operated the elevated' railroads as lessee, and this admission brings it within the terms of the taxing statute.

It follows from these views that the relator is liable to pay a tax of one per centum on its gross earnings from all sources within the State, including the earnings of the subway as well as its earnings from other sources, and that the excess dividends declared by the relator upon its own stock cannot,, upon the facts shown, be taken into consideration in stating the tax.

The determination is, therefore, modified by striking therefrom the excess dividend tax on the Interborough stock, and as so modified confirmed, without costs.

All concurred, except Smith, P. J., who wrote for annulment in an opinion in which Sewell, J., concurred.

Smith, P. J.

(dissenting):

This relator’s road was constructed under the Bapid Transit Act (Laws of '1891,j chap. 4), as amended by chapter 752 of the Laws of 1894, chapter 729 of the Laws of 1896^ and chapter 616 of . the Laws of 1900 and other statutes. Section 35 of the act, added in 1894, as amended in 1900, reads:. .

“§ 35. The equipment to bé supplied by the person, firm or corporation. operating any such road, shall include all roiling■ stock, motors, boilers, engines, Wires, ways, conduits and • mechanisms, machinery, -tools, implements and devices of every nature whatsoever used for the generation or transmission of motive power and including all power house's, and all' apparatus and• all devices for signaling and ventilation. Such person’, firm or. corporation shall be exempt from taxation .in respect to his, their or its interest under said contract and in respect to the rolling stock and all other equipment df said road;, but this exemption shall not extend to any real property which may be Owned oremplóyed by said person, firm or corporation in connection with the said road.” .'

This section has been since amended by chapter 599' of the Laws of 1905, chapter 472 of the Laws of 1906, and chapter 498 of. the Laws of T909, but the repeal of the exemption by these amendments does not seem to apply to this relator.' (See People ex rel. Interborough Rapid Transit Co. v. Tax Comrs., 126 App. Div. 610; affd., 195 N. Y. 618.)

The question here for'determination is not, as contended by the learned Attorney-General, whether exempt property may be made-the basis of an estimate of a franchise «tax. That question has been conclusively settled in the. courts of this State and of the United States. The • ultimate fact which we here must ascertain is the intention óf the Legislature in passing this section'of the Bapid Transit Act. From ’what taxes was it intended to give immunity?

While it is undoubtedly true that á statute of exemption must be construed strictly, there are other rules of construction which must .also be considered in construing this statute, which has become a contract between the State and this relator. First. This language was chosen by the State itself) and as the State dictated its form it should be bound by what at least is fairly implied" therefrom. ’ "(Imperial Shale Brick Co. v. Jewett, 169 N. Y. 143.) Again: “ Where the terms of a promise admit of more senses than one, it is to be interpreted in the sense in which the promisor had reason to suppose it was understood by the promisee.” (White v. Hoyt, 73 N. Y. 505.) With these rules of construction in mind let us look for a moment to the history of this legislation. The problem of transit facilities in New York city had become a most serious one. Greater facilities were imperatively demanded, and demanded speedily. Eoads had been constructed upon the surface of the streets and above the streets. The only avenue of relief seemed to be subway construction. But that construction required large amounts of money. The franchise was to be sold at public auction. It may fairly be assumed that for the purpose of making this franchise more attractive, and for the purpose of inducing investors to bid therefor, this immunity from taxation was given. If this be the purpose of the enactment, it should be construed as it would be fairly understood by intending purchasers, and not as a deception and a trap. Before this time it had become a part of the policy of the State to tax franchises of corporations. If it had been intended in this act to reserve the right to the State to tax this franchise, in fairness to the investors whose bids were sought, that should have been stated in this statute. It is a,)so significant that by the terms of the statute the property of tlie company succeeding to the contractor’s rights is not made exempt. The person, firm or corporation owning the contract is exempted from taxation in respect to his, their or its interest under said contract, and in respect to the rolling stock and all other equipment of said road.” 1 submit that this exemption, so expressed, would be reasonably and even necessarily understood as giving complete immunity to those who invested their money in this contract from all taxation, direct or indirect, in respect thereto. The language hardly could have been broader. The great State of New York.cannot afford by any technical construction to limit the fair intendment of its promise. After the passage of this act, and by chapter 908 of the Laws of 1896 (Gen. Laws, chap. 24), section 185 of the Tax Law was enacted so as to tax the gross earnings of- elevated and surface roads not operated by steam. This section of the Tax Law has been amended by chapter 474 of the Laws of 1906 and revised into section 185 of the present Tax Law (Consol. Laws, chap. 60 ; Laws of 1909, chap. 62). This statute gave no authority to lay this-tax upon any road constructed under the Eapid Transit Act under which this relators road was built. This would seem to be a clear recognition by the Legislature of the immunity from all taxation granted by section 35 of the Eapid Transit Act, and constitutes, I submit, a legislative construction of that act.

Strange to say, however, this is the only statute under which the right to lay this tax is claimed. This right is sustainéd by Mr. Justice Kellogg in the prevailing opinion not upon any right therein given to tax the franchise of the Interborough Eapid Transit Company, but simply upon the right therein given to tax the franchise of any company which owns or operates an elevated railroad one per cent upon the gross earnings from all sources within this State.” It appears' that this same, relator, while owning the contract rights under the Eapid- Transit Act, also is operating' the Manhattan elevated railroad' in the city of New York, and because of this fact is held by Mr. Justice Kellogg to have forfeited the exemption^ if any, which it would otherwise have under the Eapid Transit Act; This proposition 'seems .to me radically unsound for two reasonsFirst. The exemption is' given by a special statute. The Tax Law, which is held to have'overruled this exemption, is a general statute. Authority is not needed to the proposition that a general statute presumably does not repeal or modify a special act. The two must be read together, and the relator assessed upon the gross earnings of the Manhattan Elevated Eailway Company, and not upon the gross earnings from the subway constructed under the Eapid- Transit Act. Second. This promise of exemption, thereafter acted upon by the relator, became a contract between the relator and the State, which cannot be impaired by any subsequent legislative act, general or special. This rule of law dates back as far as Dartmouth College v. Woodward (4 Wheat. 518), and has been consistently held from that time to the present. If this property were simply made exempt from taxation the corporation could confessedly be taxed for the franchise to operate either the subway or the elevated road, and these receipts be made the basis of that tax. If I am right in my construction, however, the. statute has gone further, and-by fair intendment has not only exempted the property but has guaranteed immunity to the company operating the road from all taxation which includes a franchise tax as well. If this be the intendment of the statute it" could not have been within the mind of the Legislature to take from the operating company this immunity simply because the company was operating an elevated "road, nor could the Legislature lawfully do so and preserve the inviolability of contract rights under the Federal Constitution. (Art. 1, § 10, subd. 1.)

The case of State v. Baltimore & Ohio R. R. Co. (48 Md. 49) presents a very close parallel to the case at bar. There the phraseology of the Maryland act (Laws of 1826-7, chap. 123, § 18) was : “ The shares of the capital stock of the said company shall be deemed and considered personal estate and shall be exempt from the imposition of any tax or burthen.” It was thereafter sought to impose-a franchise tax upon that corporation, and it was held that the courts were not bound by the literal meaning of the words of the statute, but must look to the connection in which they are used, the subject-matter to which they are applied and the motives and objects which actuated the Legislature in conferring this privilege. The conclusion of the court in that case, as expressed in the opinion, reads as follows: The Legislature, beyond all- question, intended to confer a substantial benefit on the company and thereby to induce capitalists and others to invest their means in the construction of a road which every one deemed of so much importance to the State.. And to say that they meant to exempt the shares only and to reserve the right to tax the property and franchises, is a construction that would render the privileges thus granted of no practical benefit to the appellee. So, considering the question as one of first impression, we are of opinion that the 18th section exempts the property and franchises of the company from taxation. If the franchises are exempt, it would necessarily follow that the gross receipts derived from the exercise of its franchises are also exempt.” In Nichols v. New Haven & Northampton Co. (42 Conn. 103) the language of the exemption ■ was that the stock and income * * * shall be

forever exempt from taxation.” (See Private Laws of Conn, vols. 1-2, pp. 318, 319.) The opinion of the court in part reads: The charter of the company pretends to hold out inducenien'ts to persons, to subscribe for the stock. It says, ‘Whereas, said canal, if completed,: would -be of gréat public utility; therefore, for' the purpose of inducing persons to subscribe to the"stock of said company, be- it resolved, <fec.’ There can be no escape from the conclusion that this language was intended for deception unless the body politic of the company was intended to be' included, and was included in the promised exemption from taxation.

“ It"is ti'Ue-that all exemptions from taxation are to be construed strictly in. favor of the State and against the grantee; but this principle lias never been carried so far as to require courts to be governed by the strict letter of the grant, ignoring its manifest-import, Or so far as to justify bad "faith in the making of such contracts.

“ .It might be claimed with truth that the value of the franchise of a corporation entérs into and forms a part of the value of the stock of the corporation. The franchise is valuable in proportion to the yearly net income which the corporation receives and is likely to receive"in carryingon its business." .The stock of the corporation •derives its valué tó a great extent from the. franchise and income together; and irl some cases these sources of value double and "treble its nominal value. Hence, the-value of the stock of a corporation embraces the value of its franchise and consequently, if the stock is exempt from taxation, so must the franchise likewise be exempt. (Wilmington Railroad Company v. Reid, 13 Wallace, 264.)” .In Pacific R. R. Co. v. Maguire (20 Wall. 36) the statute provided for' an exemption from taxation of the Pacific railroad, its bed and of its buildings, machinery, engines, cars and other property. The opinion of the court in "part reads: “In The Wilmington Railroad v. Reid [13 Wallace, 264], it was held that a statute exempting all the property of a railroad company from taxation.exempts not only the rolling stock and real estate owned by it and required by the com,pany for the successful; prosecution of its business, but its franchise also. In the case before us the roadbed, building^, machinery, cars, and other property not only, but the ‘ Pacific Railroad ’ is declared to be exempt from taxation. We cannot doubt that a contract not to tax a railroad company or its property is broken by the levy of a tax upon its gross' receipts for the • transportation of freight and passengers.” For these reasons I vote for the annulment of the Comptroller’s determination.

Sewell, J., concurred.

Determination modified by striking therefrom the excess dividend tax on the Interborough stock and as so modified confirmed, without costs.  