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In re New York

May 7, 1947


Author: Hand

Before SWAN, AUGUSTUS N. HAND and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

On May 20, 1937, the debtor, New York, Ontario and Western Railway Company, filed a petition in the District Court for reorganization under Section 77 of Chapter VIII of the Bankruptcy Act, 11 U.S.C.A. ยง 205. Pursuant to the usual notice to creditors, the City of New York, on August 31, 1937, filed a proof of claim against the debtor for taxes on income which had accrued prior to the institution of the proceeding. The District Court referred the claim of the City to a Special Master and later confirmed his report.

The tax on which the proof of claim was based was imposed by the City on public utilities under authority of an enactment of the New York Legislature for the privilege of exercising a corporate franchise, or of holding property, or of doing business in the City during specified periods, to be measured by gross income. The applicable general and local laws providing for such taxes as embodied in findings 3 and 4 of the Special Master are referred to in the margin.*fn1

The trustees of the debtor appeal from the allowance of taxes: (1) on income received by the debtor from demurrage; (2) on interest derived from bonds of three wholly owned subsidiaries of the debtor; (3) on interest derived from a note of Scranton Coal Company, a subsidiary of the debtor; (4) on income accrued between March 1, 1934, and April 25, 1934.

The City appeals from the disallowance of taxes upon interest received by the debtor upon its deposits in banks outside of the City of New York.

The order of the District Court should be affirmed as to the items embraced in the appeal by the trustees of the debtor, and reversed as to the item involved in the appeal by the City of New York.



The trustees objected to a tax by the City of New York on demurrage revenue of the debtor on the ground that the demurrage was a part of its transportation revenue, not subject to tax under the enabling acts of the State of New York, and that the tax imposed a burden upon interstate commerce.

The Special Master made the following findings as to demurrage which have not been questioned by either party:

"All of said demurrage receipts were earned by the Debtor pursuant to the provisions of demurrage tariffs duly filed with the Interstate Commerce Commission and the Public Service Commission of the State of New York throughout the entire taxing period in question. All of said receipts arose and were received by the Debtor solely by reason of the delay or failure of the consignees of carload shipments of merchandise to unload said cars, destined from without to points within the City of New York.

"Said carload shipments out of which the demurrage receipts arose originated upon lines of railroad connecting with the lines of the Debtor and to some extent originated upon the lines of the Debtor in the States of Pennsylvania and New York, and in all respects were tranported thence by the Debtor over its lines of railroad through the State of New York and thence to Weehawken, in the State of New Jersey, where the same were floated to destination in the City of New York and there delivered to their respective consignees. The obligation to unload said shipments rested solely with the consignees. All of said demurrage revenue in the case of each carload shipment accrued to or was earned by the Debtor prior to the unloading of said car and its release by the consignee to the Debtor.

"After the shipments had come to rest at the terminals of independent companies (like Bush Terminal Company in Brooklyn, New York), demurrage charges were made to the consignees by the terminal company, which remitted part of the charges to the Debtor and retained part of the charges for its services."

We think it clear from the decisions of the Supreme Court that the inclusion of the demurrage charges in the gross income of the debtor on which the City levied a tax was not an unlawful burden on interstate commerce. In its decision in Independent Warehouses, Inc., v. Scheele, 67 S. Ct. 1062, 1073, that court dealt with a situation closely analogous to the one before us in the case at bar. There coal moving from Pennsylvania to New York via the Erie Railroad was deposited in New Jersey with Independent Warehouses, Inc., a warehouse subsidiary of the Erie, with which the latter had an arrangement for storage pending transit from Pennsylvania to points in New ...

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