Story Case

Under the statutes of Kentucky, every private corporation was required to pay an annual tax on its capital stock. The tax collector demanded the tax from the Louisville Waterworks Company. This was a corporation, formed, under the general law of the state, for the purpose of supplying water to the city, and its stock was entirely owned by the city. There had been no private subscriptions, but the money had been wholly supplied from the city treasury, and the corporate organization had been used merely for convenience and to keep the enterprise separate from the general finances of the city. The city claimed that this was a public company created for public good, since there were no private persons interested, and that it was, therefore, not subject to the tax on private corporations.

Should the company be required to pay the tax?

Ruling Court Case. Mannington Vs. Hocking Valley Railway Co., Volume 183 Federal Reporter, Page 133

In a suit in equity, based upon the Sherman Antitrust Act, the power of the defendant railroad corporation to buy stock in another railroad was denied by the plaintiff. The defendant relied upon an Ohio statute, which provided: "A private corporation may purchase, or otherwise acquire, and hold, shares of stock in other kindred but not competing corporations, etc." Mannington, the plaintiff, contended that this statute did not apply because, the railroad was not a private corporation.

In the opinion, Judge Sater said: "The contention can not successfully rest upon the ground that a railroad corporation is not a private corporation. Railroad companies are private corporations, in spite of the fact that they are charged with duties of a public nature which distinguish them from the purely and strictly private corporation and subjects them to a large degree of public regulation. They are in no sense, however, public corporations, such as cities, townships, counties, and other like governmental subdivisions, to which that term is applied. Their foundation is private. They are organized for gain, and their strictly private rights are as much beyond legislative control as are the rights of the purely private corporation."Therefore, since the railroad corporation is a private corporation, the contention of Mannington cannot stand.

Ruling Law. Story Case Answer

The term "private corporation" applies to every body corporate which is formed for the purpose of conducting an enterprise for the benefit of its stockholders. It is not necessarily formed for profit, but may be a benefit association, or a religious or charitable corporation which makes no direct return. But to be a public corporation, it must have been formed for the sole purpose of assuming part of the functions of government. Municipalities are the commonest forms of public corporations, and very often counties, school boards, highway commissioners, or other local governing bodies are made public corporations. Any branch of the government which is made a distinct legal entity is a public corporation. But in cases where the government conducts under corporate form an enterprise which is not essentially governing but rather a public service or public business, the corporation is not called a public corporation merely because the government owns it. If it is formed under the statutes providing for private corporations or if it is a stock company with an identity apart from its shareholders, it is still a private corporation. Any private corporation, whether owned by the government or by private individuals, which embarks in a business which has become known in law as a public service, becomes a public service corporation. Railroads, express companies, telegraphs, telephones, gas works and water works, electric light plants, street railways, hotels or inns, public grain warehouses, wharfage and lighterage companies, water carriers and boat lines, and to a limited degree, theaters and amusement parks, are examples of public service businesses. The tests are, in general, their relation to public health, their importance or necessity to public welfare, a general offer to the whole public to serve all who come, and a public character acquired historically. Public service companies are practically always private corporations.

Both in the Story Case and in the Ruling Court Case, the corporations were engaged in public service. They could be controlled in the interests of the public and compelled to treat it fairly. But they were still private corporations, the railroad, because it was organized for the profit of its stockholders, the waterworks, because it was formed under the private corporation law and was a distinct enterprise acting for the government, but not part of the government. Therefore, the waterworks was taxable as a private corporation, and should pay the tax.