The Federal Reporter with Key-Number Annotations, Volume 250: Cases Argued and Determined in the Circuit Courts of Appeals and District Courts of the United States, August-October, 1918. Page: 3
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HOUSTON BELT & TERMINAL RY. CO. V. UNITED STATES
secured them and was directly liable to the Central Trust Company
for the loan. However, the installments of interest and sinking fund
were not paid by the tenant lines to the terminal company and by it,
in turn, paid to the Central Trust Company, but were paid in quarterly
parts by the respective tenant lines to the Central Trust Company. The
title to the terminal properties and the ownership of them was in the
terminal company, subject to the mortgage. All earnings of the ter-
minal company, received from others than the four tenant companies,
were used in reduction of operating expenses, and so distributed upon
the same basis that operating expenses were paid, as between the ten-
ant companies. Advances to cover operating expenses were made
pro rata by the tenant companies from time to time. The relations
of the tenant companies, the terminal company, and the Central Trust
Company were fixed by three agreements, executed contemporaneously,
and the course of business during the years in question, 1909, 1910,
and 1911, was, as stated, in pursuance of the three agreements. The
terminal company paid a corporation tax during each year, but, in es-
timating it, did not take into account interest payments made by the
four tenant companies to the Central Trust Company in pursuance of
their contractual obligation during each of the three years. The act
of August 5, 1909, permits a deduction of interest paid by the corpo-
ration, but not in excess of interest on the amount of its capital stock.
The government claims that the amounts paid by the tenant compa-
nies to the Central Trust Company were income received by the termi-
nal company, and that, though it all went to pay interest, only an
amount equal to the interest on the amount of its capital stock was de-
ductible under the terms of the corporation tax law. The amount sued
for represents the taxes due on the amounts paid by the four tenant
companies, on account of interest, to the Central Trust Company dur-
ing the three tax years, less the interest on the amount of the capital
stock of the terminal company. Payments on account of sinking fund
requirements during the same years are conceded by the government
not to have constituted income.
The contention of the plaintiff in error is that the tenant companies
were principal debtors of the Central Trust Company and not mere
guarantors of the terminal company, and that the payments, never
having been received into the treasury of the terminal company, con-
stituted no part of its income for the years in question, and were prop-
erly left out of account by the terminal company in returning its cor-
poration tax. This is the issue between the parties. Its solution de-
pends upon whether the payments made by the tenant companies to the
Central Trust Company were properly income of the terminal company
under the corporation tax law. That law was held by the Supreme
Court in the case of Anderson v. Forty-Two Broadway Co., 239 U. S.
69, 36 Sup. Ct. 17, 60 L. Ed. 152, to be "not in any proper sense an in-
come tax law, nor intended as such, but was an excise upon the con-
duct of business in a corporate capacity, the tax being measured by ref-
erence to the income in a manner prescribed by the act itself." Section
38 of the Act of 1909, c. 6, 36 Statutes at Large, 112, provides that the
taxable net income shall be ascertained by deducting from the gross
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The Federal Reporter with Key-Number Annotations, Volume 250: Cases Argued and Determined in the Circuit Courts of Appeals and District Courts of the United States, August-October, 1918., legislative document, 1918; Saint Paul, Minnesota. (digital.library.unt.edu/ark:/67531/metadc38821/m1/18/: accessed May 29, 2017), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.