Stearns v. Minnesota
This case comes on error to the supreme court of the state of Minnesota, is brought here at the instance of certain railroad companies, and involves the question whether the real estate belonging to them, and not used in the operation of their roads, is subject to taxation according to its value, or is excepted from such ordinary rule of taxation by virtue of a contract alleged to have been made many years ago by legislation of the state, to the effect that railroad companies should pay a certain per cent on their gross earnings in lieu of taxes on all their property.

The facts are as follows, and first as to lands belonging to the St. Paul & Duluth Company: The Constitution of Minnesota, adopted in 1858, has always contained these provisions (article 9, §§ 1 and 3):

'Sec. 1. All taxes to be raised in this state shall be as nearly equal as may be, and all property on which taxes are to be levied shall have a cash valuation, and be equalized and uniform throughout the state.'

'Sec. 3. Laws shall be passed taxing all moneys, credits, investments in bonds, stocks, joint-stock companies, or otherwise, and also all real and personal property according to its true value in money; but public burying grounds, public schoolhouses, public hospitals, academies, colleges, universities, and all seminaries of learning, all churches, church property used for religious purposes, and houses of worship, institutions of purely public charity, public property used exclusively for any public purpose, and personal property to an amount not exceeding in value two hundred dollars for each individual, shall, by general laws, be exempt from taxation.'

On May 23, 1857, by the territorial legislature of Minnesota the Nebraska & Lake Superior Railroad Company was organized. Minn. Laws 1857, chap. 93, p. 323. By an act of the state legislature, of date March 8, 1861, the name of this company was changed to the Lake Superior & Mississippi Railroad Company. Minn. Laws 1861, p. 201. By this act certain of the swamp lands granted to the state by the act of Congress of September 28, 1850 (9 Stat. at L. 519, chap. 84), were granted to that company to aid in the construction of its railroad. The St. Paul & Duluth company is the successor in interest of that company, and has succeeded to all its rights, privileges, immunities, and property. By act of Congress of date May 5, 1864 (13 Stat. at L. 64, chap. 79), as amended July 13, 1866 (14 Stat. at L. 93, chap. 178), lands were granted to the state of Minnesota to aid in building a railroad from the city of St. Paul to the head of Lake Superior. The first section declaring the grant reads: 'That there be, and there is hereby, granted to the state Minnesota for the purpose of aiding in the construction of a railroad in such state from the city of St. Paul to the head of Lake Superior, every alternate section of public land,' etc. Section 5 reads:

'That the said lands, hereby granted, when patented to said state, shall be subject to the disposal of said state for the purposes aforesaid, and for no other; and the said railroad shall be and remain a public highway for the use of the government of the United States, free from all toll or other charge, for the transportation of any property or troops of the United States.'

On February 23, 1865, the legislature of Minnesota passed an act accepting the grant, and transferring the lands to the predecessor of the St. Paul & Duluth Railroad Company. Minn. Special Laws 1865, chap. 2, p. 19. The 1st section, after accepting the lands granted, reads:

'And the same are hereby granted, vested in, and transferred to the Lake Superior & Mississippi Railroad Company, its successors and assigns, to be held, used, or sold and disposed of by said railroad company, to aid in the construction of a railroad, as contemplated and provided by said act of Congress, and for the equipment and operation of the same, and for no other purpose whatever, the same to be held, used, and disposed of upon and subject to the conditions in said act of Congress provided, and upon the conditions in this act contained. That in consideration of lands granted by this act, and of the lands, rights, privileges, and franchises which have heretofore been granted to said railroad company, the said company shall, on or before the 1st day of March of each and every year after said railroad is completed and in operation, pay into the treasury of the state 3 per cent on the gross earnings of said railroad, which sum shall be in lieu and in full of all taxation and assessments upon the said railroad, its appurtenances and appendages, and all other property of said company, real, personal and mixed, including the lands hereby and heretofore granted to said company, or so intended to be granted. Provided, however, that the lands hereby and heretofore granted to said company shall be subject to like lands of individuals, to be taxed as fast as the same are sold or conveyed, or contracted to be sold, or are leased by said company, or the stumpage upon any lands is sold or contracted to be sold by said company; but no mortgage or trust deed executed by said company upon said lands shall, for the purpose of taxation, be construed as such sale, conveyance, lease, or contract of sale.' Eight days thereafter, and on March 3, 1865, an act amendatory of this act was passed. Special Laws 1865, chap. 8, p. 45. The 1st section of this act is as follows:

'1. That whenever any lands heretofore or hereafter granted to the Lake Superior & Mississippi Railroad Company to aid in the construction or completion of its road or branches shall be contracted to be sold, conveyed, or leased by said company, the same shall be placed upon the tax list by the proper officer for taxation as other real estate for the year succeeding that in which such contract for a sale, conveyance, or lease thereof shall have been made, but, in enforcing a collection of the taxes thereon, the title or interest of the said company or of any trustee or mortgagee thereof shall be in nowise impaired or affected thereby, but the improvements thereon and all the interest of the purchaser or lessee therein may and shall in case of default in the payment of taxes upon such land, be sold to satisfy the same, and it shall be the duty of the proper officers to assess and collect such taxes in accordance with the general laws relating to the assessment and collection of taxes, and that the provisions of the several acts in relation to the taxation of the lands of said company, so far as the mode of taxing such lands conflict with the provisions of this act, shall be and they are repealed. Provided, that said company shall, during the first three years after 30 miles of said railroad shall be completed and in operation, on or before the 1st day of March in each and every year, pay into the treasury of the state 1 per cent on the gross earnings of said railroad, the first payment to be made on the 1st day of March next after 30 miles of said railroad shall be completed and in operation, and shall, during the seven years next ensuing after the expiration of the three years aforesaid, pay into the treasury of this state on or before the 1st day of March of each and every year, 2 per cent of the gross earnings of said railroad, and shall, from and after the expiration of said seven years, on or before the 1st day of March of each and every year, pay into the treasury of this state 3 per cent of the gross earnings of said railroad; and the payment of such per centum annually, as aforesaid, shall be and is in full of all taxation and assessment whatever.' The 2d section provided for acceptance of the provisions of the act by the railroad company; that when accepted 'the same shall become obligatory upon the state and upon said company;' and they were accepted. Thereafter, as admitted, the railroad was constructed by the company 'in reliance upon said act.' Taxes were paid by the railroad company on its property in accordance with the terms of this alleged contract until 1895, and during those years the state made no attempt to levy any taxes upon these lands. In 1871 the following amendment to the state Constitution was by vote of the people duly adopted (Minn. Laws 1871, p. 41):

'Any law providing for the repeal or amendment of any law or laws heretofore or hereafter enacted, which provides that any railroad company now existing in this state or operating its road therein, or which may be hereafter organized, shall, in lieu of all other taxes and assessments upon their real estate, roads, rolling stock, and other personal property at and during the time and periods therein specified, pay into the treasury of this state a certain per centum therein mentioned of the gross earnings of such railroad companies now existing or hereafter organized, shall, before the same shall take effect or be in force, be submitted to a vote of the people of the state, and be adopted and ratified by a majority of the electors of the state voting at the election at which the same shall be submitted to them.'

In November, 1896, this statute passed in 1895 (Laws 1895, p. 378), was adopted by the people:

'Sec. 1. All lands in this state heretofore or hereafter granted by the state of Minnesota or the United States or the territory of Minnesota to any railroad company shall be assessed and taxed as other lands are taxed in this state, except such parts of said lands as are held, used, or occupied for right of way, gravel pits, side tracks, depots, and all buildings and structures which are necessarily used in the actual management and operation of the railroads of said companies. Provided, that said railroad companies shall continue to pay taxes into the state treasury upon their gross earnings in the same manner and in the same amount as is now provided by law, and that nothing in this act contained shall be construed to repeal said laws, except in so far as the same relate to the tax upon said lands.

'Sec. 2. Such portion or portions of any act or acts, general or special, of the state or territory of Minnesota heretofore enacted which provides or attempts to provide for any exemption of lands hereby declared taxable, from taxation, or for any other method of taxing said last-mentioned lands different from the method of taxing other lands in this state, or which are in any manner inconsistent with the provisions of this act, are hereby repealed.

'Sec. 3. If this act shall be held to be void so far as it applies to the land of any particular railroad company in this state, it shall not be ground for declaring it void or inapplicable to any other company not similarly situated.'

Under these provisions the state proceeded to levy taxes upon the lands of the St. Paul & Duluth company, and the validity of such taxation is the question involved.

Lands belonging to the Northern Pacific Railway Company are also involved in this litigation, and the facts in reference to those lands are these: On July 2, 1864, the Northern Pacific Railroad Company was chartered by an act of Congress to build a railroad from Lake Superior to the Pacific, and received a grant of public lands to aid in the construction thereof. The lands thus granted are those in respect to which the question of taxability arises. 13 Stat. at L. 365, chap. 217. By § 17 of that act the company was authorized to accept 'any grant, donation, loan, power, franchise, aid, or assistance which may be granted to or conferred upon said company by the Congress of the United States, by the legislature of any state, or by any corporation, person, or persons; and said corporation is authorized to hold and enjoy any such grant, donation, loan, power, franchise, aid, or assistance, to its own use, for the purpose aforesaid.'

By § 18 it was required to obtain the consent of the legislature of any state through which, in the operation of its road, it might pass previous to commencing work. Such consent was obtained from Minnesota by an act of the legislature of that state, approved March 2, 1865. Laws 1865, p. 228. On March 4, 1870, the legislature of Minnesota passed an act (Minn. Special Laws 1870, p. 338), the 1st and 2d sections of which are as follows:

'Sec. 1. That the lands, franchises, property, stock, and capital of the Northern Pacific Railroad Company shall be liable to assessment and taxation at the same rate and in the same manner, and not otherwise, and shall be exempt from assessment and taxation to the same extent and upon the same terms and conditions as the lands, property, and franchises of the Lake Superior & Mississippi Railroad Company, as is provided in and by an act entitled 'An Act in Relation to the Taxation of Lands Granted to the Lake Superior & Mississippi Railroad Company, approved March third, eighteen hundred and sixty-five. Provided, however, That the gross earnings of said railroad company on which a percentage is to be paid to the state shall include only the earnings of that portion of the Northern Pacific Railroad constructed and operated by said company within the limits of this state.

'Sec. 2. That said Northern Pacific Railroad Company shall have the right and authority to acquire and hold lands for right of way, depot grounds, and for all necessary purposes of said company in all respects as provided by the general laws of this state, as set forth in sections numbered consecutively thirteen to twenty-seven, inclusive, of chapter thirty-four, title one, of general statutes now in force. But where said company proceeds to condemn private property in more than one county in the same proceedings, the commissioners to be appointed shall be residents of the county where the property to be taken is situated, or of the county to which such county is attached for judicial purposes. And there is hereby granted to the Northern Pacific Railroad Company the right of way through and over any lands of this state to the same extent as is granted by act of Congress through and over the public lands to said company.'

This act was duly accepted by the Northern Pacific Railroad Company. Thereafter its road was constructed, and up to the act of 1895, supra, taxes were levied and paid in the manner prescribed. The validity of taxes levied upon the lands of this company since the act of 1895, and under the authority of that act, is challenged, and becomes in this litigation one of the questions involved.

Lands belonging to the Great Northern Railway Company were also involved in the litigation in the state courts, but that company is not here making any contention for a reversal of the judgment of the state supreme court.

After the act of 1895, approved by the vote of the people, proceedings were instituted to enforce the levy of taxes on the lands of these railroad companies, and the proceedings thus instituted are those which are now before us. The decision of the supreme court of the state was adverse to the railroad companies (72 Minn. 200, 75 N. W. 210), and the case is here on error to that judgment.

[Messrs. C. W. Bunn, Julien T. Davies, Wm. B. Hornblower, and Emerson Hadley for plaintiff in error.

Messrs. H. W. Childs, W. B. Douglas, and A. Y. Merrill for defendant in error.

Statement by Mr. Justice Brewer:

The supreme court of Minnesota held that the contract alleged to have been made with the railroad companies for a per cent of the gross receipts in lieu oc all taxation upon their property was, in view of the provisions of §§ 1 and 3 of article 9 of the state Constitution, one beyond the power of the legislature to make. We quote from its opinion:

'The language of the Constitution is clear, exact, and imperative. It requires that all property not exempt must be taxed, and that the basis of such taxation must be the cash value of the property.

  *  *  *  *

'It may be true, as claimed, that a grossearnings tax (if subject to amendment) is only another mode of arriving at equal taxation, and that such a system of commuted taxation of the property of railway companies and similar corporations is of great practical and material advantage to the state; but the fact remains that the taxation of all property upon the basis of its cash value was the sole rule ordained by the Constitution to secure equality and uniformity of taxation.

  *  *  *  *

'We hold that the statutes under which it is claimed that the lands in question are exempt from taxation in the ordinary way, upon the basis of their cash valuation, were unconstitutional when enacted, and remained so until validated by that constitutional amendment of 1871. The legal effect of such amendment was to validate them. State ex rel. Marr v. Luther, 56 Minn. 156, 57 N. W. 464.

'But this ratification or validation of the statutes was a qualified one, and the right to repeal or amend them was reserved by necessary implication, provided such repeal or amendment was adopted and ratified by a majority of the electors.

'Our conclusion is that Laws 1895, chapter 168, does not impair the obligation of any contract between the state and railway companies, and that the lands here in question are taxable in the ordinary way, as other lands are taxable.'

The Federal question thus suggested is the single one for consideration. Was there a valid contract created by the legislation providing for the taxation of all railroad property (lands included) on the basis of a per cent of the gross earnings, which was impaired by the legislation of 1895, withdrawing the lands from this arrangement, and directing their taxation according to their actual cash value? And, first, as to the St. Paul & Duluth company: That a contract was attempted to be made is obvious. The state, as trustee, held certain swampt and railroad lands. It proposed to give them to the company, subject to taxation in a certain way, if the company would construct the railroad. The company accepted the proposition and constructed the road. Thus, if the parties were competent to enter into such an arrangement, a contract was made. While some of the lands, the swamp lands, were granted to the state for a purpose other than railroad construction, they were granted in trust, and it has long since been settled that Congress alone can inquire into the manner in which the state executed that trust and disposed of the lands.  American Emigrant Co. v. Adams County, U.S. 61, 69, 25 L. ed. 563, 566.

With respect to the Northern Pacific Railroad Company, the facts are slightly different, but the state legislation in respect to it was of a character to place its land grant in the same condition, so far as the question of contract is concerned. For the land grant to the company became operative within the limits of a state only when such state consented to the construction of the road. The power to consent carried with it the power to determine the conditions upon which such consent should be granted, and when the state of Minnesota said that the Northern Pacific Railroad Company might construct its road through the state, and might accept the provisions of the congressional grant, and prescribed the conditions upon which such road should be constructed and such grant should be taken, the effect of such legislation is the same as though the state received the grant and transferred it to the company on those conditions. It said, in substance, that, though the land was not given to the state to be transferred to a railroad company (and in that case the state might have prescribed the conditions of the transfer), it was given to the company subject to the assent of the state, and the state's assent to the gift was upon the conditions it named. The offer thus made by the state was accepted, and in reliance thereon the road was constructed.

Of course, withdrawing any portion of the property protected by the 3 per cent commutation, and subjecting that to ordinary taxation, leaving the 3 per cent still due from the railroad companies, changes materially the terms of the alleged contract, so that there can be no question that if there were a valid contract created by the earlier legislation, the act of 1895 impairs its obligation. The general rule of this court is to accept the construction of a state Constitution placed by the state supreme court as conclusive. One exception which has been constantly recognized is when the question of contract is presented. This court has always held that the competency of a state, through its legislation, to make an alleged contract, and the meaning and validity of such contract, were matters which in discharging its duty under the Federal Constitution it must determine for itself; and while the leaning is towards the interpretation placed by the state court, such leaning cannot relieve us from the duty of an independent judgment upon the question of contract or no contract.

In Douglas v. Kentucky, 168 U.S. 488, 42 L. ed. 553, 18 Sup. Ct. Rep. 199, this question was considered at length, and, by Mr. Justice Harlan, after a review of some prior cases, the conclusion was thus stated (p. 502, L. ed. p. 557, Sup. Ct. Rep. p. 204): 

Notes
United States Supreme Court decisions on taxation United States Supreme Court decisions on constitutionality Automated categorization