U.S. Supreme Court Grant v. Hartford & New Haven Railroad Company, 93 U.S. 225 (1876)
Grant v. Hartford & New Haven Railroad Company
93 U.S. 225
ERROR TO THE CIRCUIT COURT OF THE UNITED
STATES FOR THE DISTRICT OF CONNECTICUT
The expression "profits used in construction" (within the meaning of the one hundred and twenty-second section of the Internal Revenue Act of June 30, 1564, 13 Stat. 284) does not embrace earnings expended in repairs for keeping the property up to its normal condition, but has reference to new constructions adding to the permanent value of the capital, and when these are made to take the place of prior structures, it includes only the increased value of the new over the old, when in good repair.
This action was brought by the Hartford & New Haven Railroad Company against Henry A. Grant, Collector of Internal Revenue for the First District of Connecticut, to recover the sum of $2,785.65 income tax, and $139.28 penalty, paid to him under protest in January, 1868. The controversy arose upon the question of the company's income for the two fiscal years ending Aug. 31, 1867. During that period they expended from their earnings $55,712.60, in constructing over the Farmington River at Windsor a new stone bridge, to be used in place of a wooden bridge which was deemed insecure; and they charged the amount to current expenses. The assessor of internal revenue for the district insisted that this sum should have been charged to account of construction, and was fairly to be regarded as "profits used in construction," within the meaning of the one hundred and twenty-second section of the Act of June 30, 1864, and, therefore, he made a special assessment of the amount. The company having appealed to the Commissioner of Internal Revenue without effect, this action was brought.
A jury having been waived, the cause was tried by the court, which found specially an agreed statement of facts. From this it appears that the amount charged to current expenses during each of the two years in question (including together the said sum of $55,712.60) was not greater than the proper ordinary current expenses and depreciation of the entire property, and that the company returned the entire balance of their gross earnings over and above said expenses, in the shape of dividends and surplus, and paid the regular tax thereon.
Judgment having been rendered in favor of the company, the collector sued out this writ of error.
MR. JUSTICE BRADLEY delivered the opinion of the Court.
The company having returned the entire balance of their gross earnings over and above current expenses, in the shape of dividends and surplus, for the period in question, and paid the regular tax thereon, we do not see why this was not a full compliance with the law. The object of the law was to impose a tax on net income, or profits, only; and that cannot be regarded as net income, or profits, which is required and expended to keep the property up in its usual condition proper for operation. Such expenditure is properly classed with repairs, which are a part of the current expenses. If a railroad company should make a second track when they had but a single track before, this would be a betterment or permanent improvement, and, if paid out of the earnings, would be fairly characterized as "profits used in construction." The works of the company would have an additional value to what they had before, with an increased capacity for producing future profits. This kind of expenditure is what Congress meant to reach, when, in the one hundred and twenty-second section referred to, it imposed a tax not only on the dividends of every railroad, canal,
and turnpike company, but also on "all profits of such company carried to the account of any fund, or used for construction."
The counsel for the government insists that this bridge was a betterment, because it was much more valuable than the old wooden bridge. But the assessor did not include the excess merely; he assessed the whole expenditure bestowed upon the new bridge, without making any allowance for the old one. His idea seems to have been that all earnings used in new constructions are made taxable by the act, without reference to betterments, or to their being substituted for other constructions. Indeed, his assessment is not for "profits used in construction," but for "earnings used in constructing new Windsor Bridge, $55,712.60." In this view he was decidedly wrong. Earnings expended on a new structure may or may not be profits. Whether they are or not depends on other things to be taken into the account besides the mere fact of such expenditure. Had the assessment been merely for the increased value of the new bridge over the old one when in good repair, the case might have admitted of very different consideration.