Opinion
This case having been heard by the Court of Claims, the court, upon a stipulation of the facts and the evidence, makes the following special findings of fact:
1. Plaintiff is a private corporation organized under the laws of the state of Washington, July 3, 1907, with an authorized capital of $5,000,000. Plaintiff's principal office and place of business is No. 1201 Fourth avenue, Seattle, Wash. The stock of plaintiff corporation is all owned and held by private individuals and corporations.
2. On February 1, 1907, the state of Washington leased unto James A. Moore a certain parcel of ground in the city of Seattle, Wash., known as "University Tract." This is the same parcel of ground under consideration in the case of State of Washington v. City of Seattle et al., 57 Wash. 602, 107 P. 827, 27 L.R.A. (N.S.) 1188. On December 3, 1907, said James A. Moore and wife assigned said lease to plaintiff corporation for a consideration of $100,000 cash and $140,000 in bonds of plaintiff corporation. Under dates of June 24, 1908, January 8, 1912, May 14, 1913, and September 29, 1915, four certain agreements were entered into by and between the state of Washington and plaintiff corporation amending or modifying the lease. Copy of each of these documents is hereby made a part of this finding by reference.
3. The land owned by the state of Washington and leased, as aforesaid, was and is held by the state of Washington for the use and benefit of the University of Washington, and the income to the state of Washington under the lease is used for educational purposes. Rental is paid direct to the university.
4. Plaintiff corporation has expended, between the years 1907 and 1928, approximately $261,477.15 in the construction of general improvements such as pavements, sidewalks, water systems, sewers, and the usual public facilities.
5. Plaintiff has complied in all respects with the terms and provisions of the lease to date.
6. Plaintiff subleased certain portions of the State University tract to the following corporations, which have expended approximately the sums hereinafter set out in the erection of buildings: (a) Metropolitan Theatre Company in the year 1911, approximately $225,000, annual rental $,5,000 payable to the plaintiff corporation; (b) Fifth Avenue Building Company, in the year 1926, approximately $1,550,000, annual rental $25,000, payable to plaintiff corporation; (c) Community Hotel Corporation, hotel building erected in the year 1924 at a cost of approximately $4,500,000, annual rental $25,000 per annum, payable to plaintiff corporation.
The total area of the university tract in use amounts to 271,413.51 square feet, exclusive of streets and sidewalks, and the area included in the above-mentioned subleases amounts to 97,984.78 square feet, or 32.4 per cent. of the total.
In each of the foregoing subleases the original lease described in finding 2 above was made a part, and all provisions thereof governed in the subleases, and all buildings erected under the subleases immediately upon their erection became the property of the state of Washington, as provided in the original lease.
7. On April 15, 1930, plaintiff filed with the then United States Collector of Internal Revenue for the District of Washington, at Tacoma, Wash., a tenative income tax return for the fiscal year ended January 31, 1930, and on May 15, 1930, plaintiff filed complete consolidated return for the same fiscal year, which latter return disclosed a taxable net income of $349,973.66 and a tax liability of $38,788.75 which was assessed. This tax was liquidated as follows:
Date:
Amount
April 15, 1930 .......................
$10,000.00
paid
July 10, 1930 ..........................
9,394.38
paid
October 15, 1930 .......................
9,697.18
paid
November 15, 1930 ......................
1,171.44
paid
January 15, 1931 .......................
1,553.93
paid
July 24, 1931 ..........................
6,971.82
abated Schedule I. T. 43352 dated July 24, 1931
-------------
Total .............................
$38,788.75
On November 15, 1930, plaintiff filed an amended income tax return designated for the period February 1, 1929, to November 13, 1929, which showed a taxable net income of $275,118.18 and a tax liability of $30,263.20.
8. The Commissioner of Internal Revenue caused an examination to be made of plaintiff's books of account and records for the period February 1, 1929, to November 13, 1929, which resulted in an adjusted taxable net income of $289,244.79, a tax liability of $31,816.93, and an overassessment of $6,971.82. This overassessment was shown in revenue agent's report dated November 12, 1930. The overassessment resulted principally from the elimination of I portion of income which was prorated to another corporation known as "Metropolitan Company." The Metropolitan Company acquired more than 95 per cent. of the stock of plaintiff corporation on November 14, 1929. The overassessment was allowed on Schedule I.T. 43352, dated July 24, 1931.
9. On May 5, 1932, plaintiff filed with the Collector of Internal Revenue a claim for the refund of $31,816.93. This claim was rejected on Schedule No. 21032 dated September 12, 1933. Plaintiff was notified of the rejection by letters dated August 2, 1932, August 9, 1933, and September 12, 1933.
10. As tenant under said lease plaintiff developed the land covered thereby to enable plaintiff to derive income from such development as is determined most advantageous by plaintiff's directors and consistent with the terms of the lease and subsequent modification agreements. To such end, plaintiff erected the buildings referred to in finding 4 hereof, and arranged for the erection of the buildings referred to in finding 6 hereof. The buildings referred to in finding 4 consist of office buildings with stores on the ground floor. Plaintiff operates these buildings for profit by renting offices and stores therein.
11. The tract of land in question lies on a hillside away from the older business section of the city. Plaintiff's chief problem has been to bring business to the tract. It is on the edge of the level business district of Seattle. Plaintiff's success is due to its aggressive management and the strength of its capital structure. Plaintiff has engaged in various subsidiary businesses as a means of developing said tract into a business center. Plaintiff's stockholders organized a bank which is located on said tract. Plaintiff operated a garage business at different times when other managements failed in order to insure garage service. Plaintiff at its own expense equipped medicinal baths, purchased and resold a store as a going concern, equipped a law library as a means of inducing lawyers to rent offices in its buildings, organized a storage company to utilize certain basement space, assisted in various ways financially tenants who lacked capital, such as purchasing fixtures or financing them in other ways, contributes annually to the support of Metropolitan Merchants Association, an organization of merchants on this tract, pays expenses of salesmen who seek new tenants, these salesmen at times traveling to San Francisco or New York. The garage business, the medicinal baths, and law library by which plaintiff attempted to attract tenants, all developed losses and were abandoned or disposed of by the plaintiff prior to 1929. The storage company also was operated at a loss, and was sold by plaintiff in 1932. During the period February 1, 1929, to November 13, 1929, plaintiff rented offices to approximately a thousand tenants and rented stores in the same buildings to approximately fifty tenants, for a gross rental of approximately $1,300,401.49. For state tax purposes the value of plaintiff's leasehold aforesaid was determined in 1927 to be $1,400,000.
12. For the years 1909 to the period involved in this suit, inclusive, plaintiff's net income and the net federal taxes based thereon which were paid by plaintiff were as follows:
James H. Douglas, of New York City, for plaintiff.
----------------------------------------------------------
Year
Net income
Net tax paid
----------------------------------------------------------
1909...................
$19,020.69
$140.21
1910...................
41,602.07
366.03
1911...................
34,932.01
435.10
1912...................
..........
7.66
1913...................
..........
157.08
1914...................
20,902.75
209.03
1915...................
..........
99.08
1916...................
14,457.08
289.14
January 31, 1917.......
None
.........
January 31, 1918.......
None
.........
January 31, 1919.......
21,302.10
2,284.08
January 31, 1920.......
8,132.52
482.93
January 31, 1921.......
172,505.20
57,459.89
January 31, 1922.......
191,534.19
62,442.95
January 31, 1923.......
200,884.58
25,110.57
January 31, 1924.......
204,304.95
25,538.12
January 31, 1925.......
273,249.72
34,270.08
January 31, 1926.......
145,512.30
18,977.23
January 31, 1927.......
259,194.71
34,991.29
January 31, 1928.......
417,644.03
55,473.94
January 31, 1929.......
355,624.39
42,378.57
February 1, 1929 to
November 13, 1929....
289,244.79
31,816.93
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Jesse R. Fillman, of Washington, D.C., and Frank J. Wideman, Asst. Atty. Gen. (George H. Foster, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and GREEN LITTLETON, WILLIAMS, and WHALEY, Judges.
WILLIAMS, Judge.
The plaintiff seeks recovery of $16,646.31, together with interest, income tax paid for the period, February 1, 1929, to November 13, 1929. The facts have been stipulated by the parties; the sold controversy being whether the income upon which the tax was imposed is subject to taxation by the United States.
The land, the subject of the lease, is located in the city of Seattle, Wash., and is commonly designated as "University Tract." It is owned by the state of Washington, and is held and used for the sole benefit of the University of Washington. The income to the state under the lease is paid direct to the university, and is used exclusively for educational purposes.
The Supreme Court of the state of Washington, in the case of State of Washington v. City of Seattle et al., 57 Wash. 602, 107 P. 827, 27 L.R.A. (N.S.) 1188, The plaintiff contends that the tax in question is in effect a tax upon the lease itself, and that as such is void under the rule laid down by the Supreme Court in Gillespie v. State of Oklahoma, 257 U.S. 501, 42 S.Ct. 171, 66 L.Ed. 338; Burnett v. Coronado Oil & Gas Co., 285 U.S. 393, 52 S.Ct. 443, 444, 76 L.Ed.2d 815, and other cases, and by this court in Marland v. United States, 53 F. (2d) 907, 3 F.Supp. 611, 78 Ct.Cl. 69.
The principle of immunity from taxation by the federal government of instrumentalities of a state and the corresponding immunity of federal instrumentalities from taxation by a state is well settled. However, it is recognized that "just what instrumentalities of either a state or the federal governments are exempt from taxation by the other cannot be stated in terms of universal application." Metcalf & Eddy v. Mitchell, 269 U.S. 514, 46 S.Ct. 172, 174, 70 L.Ed. 384. The established principle "has its inherent limitations." Fox Film v. Doyal et al., 286 U.S. 123, 52 S.Ct. 546, 76 L.Ed. 1010. "The reasons underlying the principle mark the limits of its range." Indian Motorcycle Co. v. United States, 283 U.S. 507, 51 S.Ct. 601, 603, 75 L.Ed. 1277. The immunity does not exist "where no direct burden is laid upon the governmental instrumentality, and there is only a remote, if any, influence upon the exercise of the functions of government." Willcuts v. Bunn, 282 U.S. 216, 51 S.Ct. 125, 127 75 L.Ed. 304, 71 A.L.R. 1260.
The rule of Gillespie v. Oklahoma, and Burent v. Coronado Oil & Gas Co., must be considered in the light of the limitations placed upon it in the decisions just cited, and, as stated by the court in the Coronado Case, is to be applied "strictly and only in circumstances closely analogous" to those which they disclose.
The circumstances of the present case in our opinion are not closely analogous to the circumstances disclosed in the Gillespie and Coronado Cases. The facts are clearly and fundamentally distinguishable. In both the Gillespie and the Coronado Cases the taxed income came from profits realized on the sale of oil abstracted from the lands leased. The income came directly and wholly from the thing leased; the land itself. That is not the situation here. The plaintiff's income was not derived directly from the lands leased, but came wholly from rents received from buildings which the plaintiff had erected on the premises. It came from more than a thousand tenants to whom the plaintiff had rented storerooms and offices. Except for plaintiff's large investment in buildings, amounting to almost $5,000,000, the labor incident to the successful management of the properties represented by such investment, the income could not have been realized. The fact that the buildings were erected in conformity with the terms of the lease and that title to the buildings vested immediately in the state upon their erection is not important and does not change the situation. The income upon which the tax was imposed was realized primarily from the plaintiff's large investment of capital and labor, and did not come directly from the premises leased, as in the cases relied upon. These facts remove the case from the rule announced in the Gillespie and Coronado Cases. Eckstein v. United States, 10 F.Supp. 231, 80 Ct.Cl. 725.
The challenged tax is not imposed upon the state of Washington, nor upon the lease, the instrumentality of the state, but upon the plaintiff, a private corporation holding the lease. The immunity claimed, therefore, exists only if the effect of the tax is to place a substantial burden upon the exercise of the state's essential functions of government, and as stated in Willcuts v. Bunn, supra, "it must appear that the burden is real, not imaginary; substantial, not negligible." "The application of the doctrine of implied immunity must be practical ( Union Pac. Railroad Co. v. Peniston, 18 Wall. 5, 31, 36, 21 L.Ed. 787), and should have regard to the circumstances disclosed." Burnet v. A.T. Jergins Trust, 288 U.S. 508, 53 S.Ct. 439, 441, 77 L.Ed. 925.
The amount of rental paid to the state under the lease is definitely fixed by the terms of the lease, and is paid at stated intervals unaffected by whether or not the plaintiff is taxed on the profits of its business. Theoretically the tax may have some effect upon the amount of rental reserved in the lease, but, if so, its influence is so remote and indirect as to be imaginary rather than real. As a practical matter, therefore, the imposition of the tax against plaintiff places no substantial burden upon the state's exercise of any essential function of government. It follows that the petition must be dismissed, and it is so ordered.