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Delaware v. Division of Tax Appeals

Decided: October 17, 1949.

DELAWARE, LACKAWANNA AND WESTERN RAILROAD COMPANY, APPELLANT,
v.
DIVISION OF TAX APPEALS, NEW JERSEY STATE DEPARTMENT OF TAXATION AND FINANCE, ET AL., RESPONDENTS. WALTER P. GARDNER, TRUSTEE OF THE PROPERTY OF THE CENTRAL RAILROAD COMPANY OF NEW JERSEY, APPELLANT, V. DIVISION OF TAX APPEALS, NEW JERSEY STATE DEPARTMENT OF TAXATION AND FINANCE, ET AL., RESPONDENTS



On appeal from the Superior Court, Appellate Division, whose opinion is reported in 2 N.J. Super. 93.

For affirmance -- Chief Justice Vanderbilt, and Justices Case, Heher, Oliphant, Wachenfeld, Burling and Ackerson. For reversal -- None. The opinion of the court was delivered by Oliphant, J.

Oliphant

[3 NJ Page 30] These are appeals from judgments of the Appellate Division of the Superior Court affirming judgments

of the Division of Tax Appeals, Department of Taxation and Finance, against the Delaware, Lackawanna and Western Railroad Company for the tax years 1942 to 1946 inclusive and against the Central Railroad Company of New Jersey for the tax year 1946.

The former company will be referred to as the Lackawanna and the latter as the Central.

The Lackawanna appeal involves (1) items of back taxes claimed to be proper deductions in years other than the years in which the taxes were due and payable; (2) items of interest paid on account of default in payment of principal taxes and claimed to be proper charges to the railroad tax accrual accounts in the years in which they were paid; and (3) an item representing an amount paid under protest and later refunded, which the Lackawanna claims to be a proper accrual against its 1946 operating income.

The Central appeal involves the last two items referred to in the Lackawanna appeal, interest payment and the payment of an amount ultimately found not to be due. Central makes no claim for deductions for items of back taxes it having charged all its taxes to current accounts as such taxes became due and payable, notwithstanding it was contesting its liability for a substantial portion of such taxes. The several items will be discussed in the order set forth above.

The Back Taxes.

As was pointed out in Norton v. State Board of Tax Appeals, 134 N.J.L. 57 (E. & A. 1946), the tax levied on railroad property had for years been continuously in litigation and large amounts of these taxes were in default. In 1941 a new method of taxing such property was enacted, P.L. 1941, c. 291. This act was amended the following year by P.L. 1942, c. 169 (N.J.S.A. 54:29A-1 et seq.). These laws in substance provided for a combination property tax and franchise excise tax computed in a given year on the basis of the net operating income of a railroad system for the preceding calendar year. The tax was not a property tax upon the net

income itself but rather an excise tax measured by the net operating income of the preceding year and we are here concerned with whether items of back taxes are properly chargeable as deductions from the operating revenue of years other than that against which such taxes were levied and during which they became due and payable.

Clearly net operating income for a given year cannot be determined by deducting unpaid taxes of prior years or the accrued interest upon such unpaid taxes. The excise being measured by the net operating income for the prior year, this necessarily excludes all items of debit not related to that year's operation.

The argument of appellants proceeds on the hypothesis that the Act of 1941 required the State Tax Commissioner to allow as deductions in determining the next preceding year's net operating income any amounts of back taxes permitted by the Interstate Commerce Commission to be included in current operating income accounts. This interpretation would defeat the legislative purpose. It would put a premium on defaults in the payment of taxes by thereby decreasing the tax burden.

Lackawanna defaulted in payment of its 1933 taxes. In 1939 the litigation concerning these taxes was ended and payment in an amount equal to unpaid principal only was made. Lackawanna also defaulted in payment of taxes for the years 1934 to 1940 inclusive. The determination of the tax litigation for these years was finally determined in 1941 when the United States Supreme Court denied certiorari. From 1933 to 1940 Lackawanna paid a portion of the tax levied in each year but charged to current accounts an amount in excess of that which it paid although the whole of the unpaid amount was in litigation. As was pointed out in Norton v. State Board, supra, and as again disclosed by the instant record, during all the period from 1932 to 1940 in which railroad taxes were being contested and litigated certain railroad companies accrued all of their current taxes in the years in which they were levied, while others accrued only the uncontested portion thereof. That Lackawanna's treatment of such items

was not orthodox is disclosed by the various certificates covering the audits for ...


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