Atlantic & Danville Railway Co. v. Southern Railway Co.

Holt, J.,

delivered the opinion of the court.

Error to a judgment of the Circuit Court of the city ■of Norfolk, in a proceeding by motion for judgment for money. Judgment for defendant. Plaintiff assigns error.

By an indenture of lease of date August 31, 1899, plaintiff demised and leased to the defendant for a period of fifty years certain of its lines of railroad, rights, franchises and appurtenances in consideration of a “fixed rental” which is now $109,000.00 per annum, and a certain “contingent rental,” the language of the lease relative to it being:

“Whenever and as often as the Southern Company shall declare and pay a dividend upon or in respect to its present issues of common stock now outstanding to *704the par value of $120,000,000.00, or upon or in respect of any substitutes therefor, the Southern Company at the same time shall also pay the Danville Company a gross sum which shall be equal to two hundred and eighteen twelve thousandths (218/12000) of the sum total of the dividend then paid upon or in respect of such $120,000,000.00 of common stock of the Southern Company or any substitutes therefor, but such contingent rental shall be paid upon the express understanding and covenant of the Danville Company, as special consideration moving the Southern Company to make said payments as aforesaid, that the gross sum so received by the Danville Company is by that. Company to be used for and applied so far as may be lawful to the payment of dividends upon its common stock, which at no time is to exceed $2,180,000.00, it being the intention hereof that during the original term created by this indenture each of the 21,800' shares of common stock of the Danville Company shall receive the same advantage by way of dividends as shall be given to any of the one million two hundred thousand shares of the common stock of the Southern Company now outstanding, or its substitutes, proper-adjustment to be made in case of any modification or conversion of said one million two hundred thousand shares; but no successor of the Southern Company, by foreclosure or sale, shall have any right to the benefits of this lease unless it shall make with the DanvilleCompany, at the time of such succession, an agreement, as to a contingent rental, thereafter to be paid by such, successor, which shall be relatively equivalent, under the then existing conditions, to that herein agreed to-be paid by the Southern Company.”

From the operation of this indenture, plaintiff reserved certain warehouses and riparian rights in the-city of Danville and continued its corporate existence.. *705This instrument is elaborate in its details, appears to have been drawn with the utmost eare and contains many other covenants and agreements not, with exceptions to be noted, particularly pertinent to the issue here.

No contingent rental became due until 1924, when the defendant resumed payment of dividends to its own common stockholders and paid to the plaintiff $81,700.00, that being 218/12000 of the sum total of dividends paid to the defendant’s own stockholders and was the exact sum which it had contracted to pay. Afterwards and on this gross sum so received, the plaintiff paid to the Federal Government an income tax of $10,218.75. It is this sum that the plaintiff in this action is seeking to recover over. With the motion for judgment is filed a copy of the lease. There was a demurrer which was sustained by the trial court. To that judgment a writ of error has been obtained and the issue so made is now before us.

In our approach, certain general principles are to be remembered.

The deed of lease is to be regarded in the light of the following well known rules of construction: (1) The language of the contract is to be construed most strongly against the grantor; and (2) The intention of the parties must be ascertained by reference to the entire instrument and not to disjoined parts of it. 2 Min. Inst. 1056, 1058.

In Chamberlain v. Brown, 141 Iowa 549, 120 N. W. 338, the court says: “There is another familiar rule' applicable to cases of this kind that, if the meaning and effect of the lease be fairly capable of two constructions, that will be adopted which‘is most favorable to the lessee.”

The intention of the parties is at times of the utmost *706importance, but this intention must be that in being when the contract was made. Their present intention is entirely plain.

The indenture of lease was entered into on August 31, 1899. In 1895, the Supreme Court of the United States had held in Pollock v. Farmers Loan and Trust Company, 158 U. S. 601, 15 S. Ct. 912, 39 L. Ed. 1108, that the tax imposed by an act of Congress of 1894 (28 Stat. 509), so far as it fell upon the income of real estate and personal property, was a direct tax within the meaning of the Constitution of the United States (Article 1, sec. 9) and, therefore, unconstitutional and void. The sixteenth amendment to the Federal Constitution authorizing Congress to lay and collect taxes on income was not adopted until February 25, 1913, and it cannot reasonably be assumed that Federal income taxes were in contemplation of the parties in 1899. This is not a conclusive presumption, but it is highly persuasive. Des Moines Union Railway Co. v. Chicago Great Western Ry. Co., 188 Iowa 1019, 177 N. W. 90, 9 A. L. R. 1557.

This tax paid by the plaintiff was assessed under section 230 of the United States revenue act of 1924 (26 U. S. C. A. sec. 981; U. S. Comp. St. sec. 6336 1/6N) providing that:

“In lieu of the tax imposed by section 230 of the revenue act of 1921, there shall be levied, collected ■ and paid for each taxable year upon the net income of every corporation a tax of twelve and a half per centum (1234>%) of the amount of the net income in excess of the credits provided in sections 236 and 263.”

The tax so levied “is not similar to other forms of taxation, since it is not imposed upon property or business but upon the proceeds arising therefrom. Black on Income and Other Federal Taxes, see. 1. An *707income tax is an assessment upon the income of the person and not upon any particular property from •which that income is derived.” Young v. Illinois Athletic Club, 310 Ill. 75, 141 N. E. 369, 30 A. L. R. 985.

In Stony Brook R. Corporation v. Boston & M. R. R. (Mass.), 157 N. E. 607, the court said:

“Doubtless income when received is property. But a tax on the income of a corporation is not imposed directly on its property but against the gain or revenue derived from its property. Income is something derived from property, labor, skill, ingenuity or sound judgment, or from two or more in combination. It is not commonly thought of as property but as gain derived from property, or some other productive source.”

Under this contingent rental clause, defendant was required to pay “a gross sum” that was 218/12000 of the sum total of the dividends paid upon its own common stock whose face value was then 1120,000,000, and this exact sum appears from the plaintiff’s motion to have been paid, and having paid all that it was required to pay it can be made to pay no more. This sum was “a gross sum” and the plaintiff contracted to apply the same to the payment of its own stockholders by way of dividends “so far as may be lawful,” and so it becomes immediately apparent that the possibility of contingencies which would prevent an entire payment over was in the minds of the contracting parties. Upon the happening of such a contingency, the stockholders would necessarily receive net less than the gross sum-paid over to their company and this distinction is emphasized by the fact that the word “gross” appears' twice in this paragraph and distribution, as a matter of contract here and of general law, had to be made subject to paramount claims. This contingent rental had to be paid “at the same time” that the Southern Rail*708way paid dividends to its own stockholders. The Dan-ville Company owned other property and so the income tax to be ultimately assessed was at that time “incalculable as to amount.” Bolling v. Stokes, 2 Leigh (29 Va.) 178, 21 Am. Dec. 606.

Stress is laid upon this statement: “It being the intention hereof that during the original term created by this indenture each of the 21,800 shares of the common stock of the Danville Company shall receive the same advantage by way of dividends as shall be given to any of the one million two hundred thousand shares of the common stock of the Southern Company now outstanding.” We have already seen that the parties recognize that it might at times be unlawful to do this, and, therefore, a gross sum sufficient for this purpose was all that was required by the contract. In fact, it would have been impossible to pay immediately a net sum adequate therefor. There was no way of telling what paramount lawful charges might be. Even if this were not true, omnibus expression of intention cannot override the plain language of the lease. No man can be required to pay more than he has contracted to pay. Parke Building Company v. Yost Fur Company, 208 Mich. 349, 175 N. W. 431. There is nothing in this paragraph which requires the defendant to pay more than it has paid, but it is said that it must be read in connection with that dealing with taxes and this is true. The provision relied upon by plaintiff to thus fortify its ease is:

“That in addition to the annual and other rental hereinbefore provided for, it will assume and pay as they fall due and become payable all lawful taxes, levies,' charges and assessments which may be made upon the Danville Company or upon the demised premises, during the term hereby created, and any and *709all renewals thereof, by the United States or by any State, city, county, municipal or governmental authority, and likewise will assume and pay such proportion of all such lawful taxes, levies, charges and assessments for the current tax year in which this indenture is executed, as the portion of such year during which the Southern Company may be in possession and enjoyment of the demised premises under this indenture shall bear to the entire tax year.”

This casually and upon its face would seem to cover all forms of taxation, but such an embracing scope does not usually attach. In the beginning it will be observed that the taxes to be so paid are not those due by the Danville Company, but those assessments “which may be made upon the Danville Company or upon the demised premises.”

We have been cited to no cases in Virginia directly in point, but Bolling v. Stokes, supra, illustrates the care with which such undertakings are scrutinized. In that case Stokes undertook to pay a certain ground rent for land and in addition “besides all taxes and other public dues in any manner accruing upon the premises; which said rent should be paid half yearly, ‘besides taxes and public dues of every kind.’ ”

Against the lot so leased a paving tax was afterwards assessed. It was held that the lessee was under no obligation to pay it and the court in discussing the obligations which he had assumed said:

“To extend them to an expense unknown by the parties, incalculable as to amount, uncertain as to time, and in which the lessee could have no certain interest, would be to disregard all the circumstances under which the contract was made. It is impossible to suppose that a sum so uncertain in amount, and which might be as large as the sum that was in fact paid, *710could have been taken into the calculation of the value of the lot, at the time the lease was made. There was nothing by which it could be estimated, like the usual and customary taxes and public dues; nor does it come entirely within any correct definition of the terms taxes or other public dues. It was an uncertain and extraordinary assessment.”

It thus appears that our court stressed the conclusion that this tax was unusual in character and unexpected in fact. At least with equal force this may be said of the Federal income tax which had already been declared unconstitutional by the United States Supreme Court.

An examination of recent cases shows that kindred issues have elsewhere frequently been considered. Des Moines Union Ry. Co. v. Chicago Great Ry. Co., supra, is very much in point. The Chicago Company, lessee, undertook to pay “one-third of all taxes or assessments special or otherwise, and public charges of every kind and nature that shall or may be taxed or assessed against the Des Moines Company or its property during the aforesaid term of years.” There the obligations assumed are certainly as broad as those in the case at bar, but the court held that an income tax unlawful when the lease was made could not have been in contemplation of the parties and that a tax thereon to be paid by the lessee was not required by the terms of the covenant. Among cases cited is Bolling v. Stokes and the early case of Van Rensselaer v. Dennison, 8 Barb. (N. Y.) 23, where it was said that an undertaking by a lessee to pay “all ordinary and extraordinary taxes, charges and assessments did not include an obligation to pay taxes assessed against the landlord upon rents due to him. ’ ’ It will be seen that the court construed the provision to pay all taxes assessed against the lessor as *711meaning in substance and undertaking to pay all taxes “with respect thereto” of the demised premises, although this limitation did not in terms appear in the contract, a conclusion entirely reasonable. The court was of opinion that such was its intent and meaning and dealt with it as though that limitation had been inserted there. In some of the cases to which we will have occasion to refer this reservation is not expressly made but its presence adds nothing to a promise made in general terms to pay all taxes.

In Parke Building Co. v. Yost Fur Co., supra, the lessee undertook to pay in addition to the rent: “All rates, taxes, charges for revenue and otherwise, assessments, and levies, general and special, ordinary and extraordinary of every name, nature and kind whatsoever, including water rates, which may be taxed, charged, assessed, levied or imposed upon said premises, and upon any and all buildings and improvements thereon and any personal tax levied or assessed upon said party of the first part, which may be assessed, levied or imposed upon the leasehold estate hereby created.”

These provisions did not cover an income tax.

In Brainard v. New York Cent. R. Co., 242 N. Y. 125, 151 N. E. 152, 45 A. L. R. 751, there was this covenant before the court for construction:

“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.”

The court said:

“With monotonous frequency the courts have held in this connection that a tax on the rents of income of real property is not considered a tax on the property *712itself. When the lessee is to pay all taxes, ordinary and extraordinary, which shall he imposed on the demised premises of ‘in respect thereof/ the taxes 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, 68 N. E. 994.”

In Illinois Central Ry. Co. v. Indianapolis Union Ry. Co. (C. C. A.), 6 Fed. Rep. (2nd Series) 830, the court said:

“A lessee’s covenant to pay all taxes and assessments does not require him to pay income tax which the lessor may be required to pay upon the rent received. Jersey City Gas Co. v. U. G. Imp. Co., 58 Fed. 324, 7 C. C. A. 250 (3 C. C. A.); Suter v. Jordan Marsh Co., 225 Mass. 34, 113 N. E. 580; Young v. Illinois Athl. Ass’n, 310 Ill. 75, 141 N. E. 369, 30 A. L. R. 985; Des Moines Union Ry. Co. v. C. G. Ry. Co., 188 Iowa 1019, 177 N. W. 90 [9 A. L. R. 1557]; Parke Building Company v. Yost Fur Company, 208 Mich. 349, 175 N. W. 431; Codman, et al. v. Am. Piano Co., 229 Mass. 285, 118 N. E. 344; Woodruff v. Oswego Starch Factory, 177 N. Y. 23, 68 1ST. E. 994. In Young v. Illinois Athl. Ass’n, supra, the eases are reviewed and from them the court properly concludes: ‘It has been the universal holding of courts considering the question, so far as we are able to find, 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.’ ”

Other eases might be cited but these suffice. A lessee is never required to pay an income tax on rent unless he has entered into a compelling express contract. In Suter v. Jordan Marsh Co., 225 Mass. 34, 113 N. E. 580, a covenant to pay “all taxe^ and assessments whatsoever, except betterment taxes, which may be *713levied for or in respect of the said leased premises, or any part thereof, or upon or in respect of the rent payable hereunder by the lessee howsoever or to whomsoever assessed” was held to include the income tax assessed upon the lessor on account of the rent received under the lease, the court being of opinion that the contract in express terms provided for such payment. The same conclusion for the same reason was reached in Kimball v. Cotting, 229 Mass. 541, 118 N. E. 866, L. R. A. 1918C, 1189, and Kimball v. Cotting, 234 Mass. 172, 125 N. E. 551, whüe in Codman v. Am. Piano Co., 229 Mass. 285, 118 N. E. 344, it was held that an agreement to pay “all taxes and assessments whatsoever which may be payable for or in respect of the leased premises during the term thereof except assessments for betterments” imposed no such obligation, and to the same effect is Stony Brook B. Corp. v. Boston & M. R. R. (Mass.), 157 N. E. 607, decided in July, 1927. These Massachusetts cases, in some of which the right to impose the tax was upheld, and in some denied, brings out clearly the fact that general assumption of obligations to pay all taxes is not sufficient. The obligation to pay this particular tax must be clearly stated.

We, therefore, are of opinioh that an agreement to pay taxes and assessments “which may be made upon the Danville Company or upon the demised premises” does not cover an income tax levied in circumstances such as are shown in the case in judgment, and that the obligation to pay taxes was not extended by undertakings in any other paragraph of the indenture lease which have been fully performed.

The judgment of the lower court must be affirmed.

Affirmed.