People v. Boston & Maine Railroad

Cochrane, P. J.: The question is whether the mortgage recording tax imposed by section 253 of the Tax Law (as amd. by Laws of 1916, chap. [55] 323) applies to bonds secured by a corporate mortgage to a trustee and issued to pay matured bonds of the same amount and secured by the same mortgage with respect to which matured bonds a tax has been paid. The defendant on December 1, 1919, executed to Old Colony Trust Company and S. Parkman Shaw, Jr., as trustees a trust mortgage covering its real property to secure bonds in the aggregate principal amount of over $95,000,000. When the mortgage was recorded the recording tax was paid on the amount mentioned. Subsequently at different times the defendant under the provisions of said trust mortgage issued thereunder three series of bonds aggregating $21,558,000. The proceeds of these bonds were used to pay and discharge an equal amount of the former bonds. The statute applicable to the question is section 259 of the Tax Law (as amd. by Laws of 1917, chap. 573) which so far as material provides as follows: “ Trust mortgages. In the case of mortgages made by corporations in trust to secure payment of bonds or obligations issued or to be issued thereafter, if the total amount .of principal indebtedness which under any contingency may be advanced or accrue or which may become secured by any such mortgage which is subject to this article has not been advanced or accrued thereon or become secured thereby before such mortgage is recorded, it may contain at the end thereof a statement of the amount which at the time of the execution and delivery thereof has been advanced or accrued thereon, or which is then secured by such mortgage; thereupon the tax payable on the recording of the mortgage shall be computed on the basis of the amount so stated to have been so advanced or accrued thereon or which is stated to be secured thereby. * * * Whenever a further amount is to be advanced under the original mortgage, or shall accrue thereon or become secured thereby, the corporation making such mortgage shall pay the tax on such amount,” etc. There is no provision in the mortgage or otherwise requiring the original bondholders to accept new bonds in place of those matured. They were entitled to have their bonds paid. The transaction was in no sense an exchange of bonds. The new bonds were placed on the market and the proceeds thereof used to pay and discharge the old bonds. The indebtedness, therefore, was not the same. The transaction consisted of the substitution of one “ principal indebtedness ” in place of another. The defendant would read the statute as if it applied to an indebtedness which might be secured by the mortgage at any one time. The statute by its phraseology gives no intimation of such a purpose. The defendant says: “ The tax is to be measured by the total debt [56] secured.” That is true but not necessarily secured at any one time. I think emphasis should be placed on the words “ principal indebtedness ” and it is in respect to such an obligation “ which under any contingency ” may be secured by the mortgage that the tax is imposed. An old debt or obligation existed in respect to which the tax was formerly paid. A new debt or obligation has now come into existence which is equally subject to taxation. If old bonds are paid with corporate earnings and thereafter new bonds for the same amount are issued under the same mortgage to provide for equipment clearly the new bonds are not exempt from the tax merely because the mortgage indebtedness has not been increased. I do not see that it makes any difference whether the proceeds of the bonds are used to pay a former indebtedness or to pay for new equipment or any other purpose. In any event it is a new debt or obligation which the mortgage secures. The old debt has been destroyed. A new one has been created. If this trust mortgage contained no refunding provisions and the defendant were required to resort to another mortgage to secure its new bonds there would be no question about its liability for the tax. This court has said: “The statute does not con-' template that if a man pays one mortgage with money borrowed upon another mortgage, the latter mortgage is exempt from taxation.” (People ex rel. Astor Trust Co. v. State Tax Commission, 174 App. Div. 320, 326.) A party may not indirectly accomplish that which by direct methods the law does not permit.. The parties to a mortgage may not by inserting therein appropriate provisions constituting the mortgage a security for a new indebtedness to take the place of the old evade the provisions of the Tax Law. The method adopted may be entirely appropriate for the purposes of the mortgagor but it should not be used as a device to escape taxation. I think judgment should be directed in favor of the plaintiff as demanded by it in the submission, without costs. All concur, except Kiley, J., dissenting, with a memorandum.