New York Ex Rel. Interborough Rapid Transit Co. v. Sohmer

Background

A company was formed to equip, maintain, and operate New York’s rapid transit subway under a state law that included a written exemption from taxation “in respect to” a contractor’s interest and equipment. The City made an original construction contract in 1900 and later assigned operating rights to the petitioner, which also leased Manhattan elevated lines. Earlier tax assessments were challenged, one set aside by the Court of Appeals, and the current assessments were reviewed and sustained by the State courts before coming here.

Reasoning

The central question was whether the statute’s contract exemption meant the State could not tax the corporate right to operate the subway. The New York Court of Appeals read the exemption literally as protecting an interest “under the contract” and equipment, not the separate right to be a corporation. The Supreme Court accepted that view, explaining that being a corporation is a form of organization and not the same thing as the contract interest, so the State may tax the corporate franchise or measure taxes by capital stock or gross earnings.

Real world impact

The ruling means companies running the subway can face state franchise or corporate taxes despite a contract that exempted equipment and contract-based interest. The company lost its challenge to New York’s tax measures and the State’s assessments were affirmed, leaving the practical taxing rules intact for similar transit enterprises.