The opinion of the court was delivered by: FULLAM
On February 28, 1975, Congress enacted the Regional Rail Reorganization Act Amendments of 1975, P.L. 94-5 "to provide emergency financial assistance to bankrupt rail carriers in the Northeast and Midwest in order to continue essential rail services." See Report of the House Committee on Interstate and Foreign Commerce, February 10, 1975, p. 3.
Section 605 of the amendatory statute provides as follows:
"§ 605(a) Notwithstanding any other provision of law, no railroad in reorganization shall withhold from any State, or any political subdivision thereof, the payment of the portion of any tax owed by such railroad to such State or subdivision, which portion has been collected by such railroad from any tenant thereof.
In July, the Trustees of the Debtor filed with this Court a report, dated July 15, 1975, setting forth the actions taken and proposed to be taken by the Trustees to comply with § 605, as they interpreted it. Pursuant to Order No. 1970, copies of this report have been furnished to all taxing authorities and other interested parties, all of whom have been afforded an opportunity to respond to the Trustees' proposals. Various objections having been filed, a hearing was held on October 15, 1975.
Pursuant to Order No. 70 in these proceedings, the Trustees have, for the most part, deferred the payment of all state and local real estate taxes assessed against the Debtor's property. In re Penn Central Trans. Co., 325 F. Supp. 294, 299 (E.D. Pa. 1970), aff'd, 452 F.2d 1107 (3d Cir. 1971), cert. denied, 406 U.S. 944, 92 S. Ct. 2040, 32 L. Ed. 2d 331 (1972). The funds which would otherwise have been used to pay such taxes have been expended by the Trustees to meet other operating expenses of the Debtor.
Much of the Debtor's real estate is leased to tenants. Rents paid by the tenants are included in the revenues of the Debtor which have been expended in support of continued rail service. In many instances, the lease arrangements between the Debtor and its tenants include provisions whereby an identifiable portion of the rent charged is attributable to taxes upon the property. In some cases, the tenant is required to pay a base rent plus, inter alia, an amount equal to the taxes assessed against the real estate. In other instances, by virtue of so-called "tax escalator clauses" the tenant is required to pay a base rent plus an amount equal to any increases in the taxes assessed against the property.
In Orders Nos. 107 through 118, certain tenants of valuable New York real estate holdings of the Debtor were authorized to pay taxes directly to the taxing authorities, rather than to the Debtor as contemplated by their leases. But with those exceptions, it is generally accurate to state that no real estate taxes assessed against the Debtor's properties have been paid since reorganization, until after the enactment of § 605; and that all sums paid to the Trustees by tenants have been used to meet current operating expenses, even though some of those payments had the effect of satisfying the tenant's obligation to pay the equivalent of taxes or increased taxes upon the particular property involved.
2. Indentifying the Tax Amounts Subject to the Provisions of § 605.
Section 605 refers to "the payment of the portion of any tax owed by such railroad to such state or subdivision, which portion has been collected by such railroad from any tenant thereof." All taxes are assessed against, and owed by, the Debtor. In the case of rental property, it is a reasonable assumption that the total amount of what the tenant pays to the landlord is calculated at least in part upon the taxes assessed against the property, no matter what terminology is employed in the lease arrangement. Hence, the argument could conceivably be made that some portion of all rent collected by the Trustees is within the statutory terminology, ". . . the portion of any tax owed by such railroad . . . which portion has been collected by such railroad from any tenant thereof."
At the other extreme, it could perhaps be argued that no portion of any tax is ever collected from the tenant, as a tax, but only as rent. In their July 15, 1975 report, the Trustees adopt the more reasonable approach, namely, that § 605 was intended to apply to that portion of the payment made by a tenant which is specifically identifiable as intended by the parties to cover real estate taxes on the demised property. Under this view, it is immaterial whether the "tax" portion of the tenant's payment is made by a separate check, or whether it covers all, or only an increase in, the taxes assessed against the property. ...