Summary
In Commonwealth v. Provident Trust Co. of Philadelphia, 319 Pa. 385, 180 A. 16, the court below again applied the apportionment method and the Commonwealth appealed, taking the position that no deduction of exempt securities should have been allowed because the company had not affirmatively shown that such securities were investments of capital, surplus and undivided profits.
Summary of this case from Commonwealth v. Union Tr. Co. of PittsburghOpinion
May 27, 1935.
June 29, 1935.
Taxation — Trust companies — Shares of stock — Shares owned by nonresidents — Acts of June 13, 1907, P. L. 640, and May 7, 1927, P. L. 853 — Constitution of United States — Shares of other corporations purchased out of capital — Surplus and undivided profits — Burden of showing — Evidence — Formula for ascertaining deductions — Numerator, denominator and multiplicand.
1. Shares of stock of a corporation may be taxed by the state of incorporation whether in the hands of resident or nonresident owners. [386-7]
2. Under the Act of June 13, 1907, P. L. 640, as amended by the Act of May 7, 1927, P. L. 853, which imposes a tax upon shares of stock of Pennsylvania trust companies, shares of stock owned by nonresidents or foreign corporations are taxable. [386-7]
3. The Act of 1907, as amended by the Act of 1927, is not in violation of the Fourteenth Amendment to the Constitution of the United States. [386-7]
4. The burden is upon the trust company to show that shares of stock of other corporations which it claims are not taxable were purchased out of capital, surplus and undivided profits, but such facts may be shown in two ways: first, if the investment appears inherently as a part of the capital stock structure; and, secondly, if the investment is earmarked and set up as made out of the capital account. [387]
5. Under the Act of 1907, amended by the Act of 1927, which provides that the actual value of each share of stock shall be ascertained by adding together so much of the amount of capital stock paid in, surplus and undivided profits as is not invested in shares of stock of other corporations liable to pay to the Commonwealth a capital stock tax, or relieved from payment of capital stock or tax on shares, and dividing the amount by the number of shares, so much of the shares of the trust company is not taxable as is invested in the stock of corporations which are relieved from the payment of capital stock tax by statute or in any other way by law. [389-94]
6. Shares of stock of a trust company are not taxable under the Act of 1907, as amended, to the extent that they are invested in shares of a federal reserve bank. [394]
Argued May 27, 1935.
Before SIMPSON, KEPHART, SCHAFFER, MAXEY, DREW and LINN, JJ.
Appeal, No. 20, May T., 1935, by plaintiff, from judgment of C. P. Dauphin Co., Commonwealth Docket, 1932, No. 428, in case of Commonwealth v. Provident Trust Company of Philadelphia. Judgment affirmed.
Appeal by trust company from resettlement for tax on shares. Before HARGEST, P. J., WICKERSHAM and FOX, JJ., without a jury.
The facts are stated in the opinion of the lower court, HARGEST, P. J., in part, as follows:
A number of exceptions have been filed to our findings and judgment in this case, both by the Commonwealth and by the defendant, reported in 40 Dauphin 146. Because of the great importance of the questions raised we have carefully reviewed all of these exceptions. The exceptions which we shall discuss are divided into four classes: (1) The defendant excepts to our conclusion that it is not relieved from tax upon shares of stock which are owned by nonresidents of Pennsylvania or by foreign corporations and asks us to find additional conclusions of law in that respect. (2) The Commonwealth contends that it is entitled to tax without deduction because the appellant has not affirmatively shown that the shares of stock of other corporations which it owns were purchased out of capital, surplus or undivided profits. (3) The Commonwealth excepts to the formula of the fraction which we found to be the proper one to ascertain the taxable value of what are called, for the purpose of brevity, "exempt shares." (4) The defendant excepts to the taxation of its holdings in the shares in the federal reserve bank.
1. The defendant earnestly contends that if the statutes of Pennsylvania have created an artificial situs for the taxation of the shares of its stock which are held by nonresident individuals or foreign corporations at the domicile of the defendant corporation, such taxation would be in violation of the Fourteenth Amendment to the Constitution of the United States. This is an interesting question and, so far as this court is concerned, it might have been debatable if it were not for the opinion of the Supreme Court of Pennsylvania in the case of Com. v. Schuylkill Trust Co., 315 Pa. 429, 432, which holds that "shares of stock of a corporation may be taxed by the state of incorporation whether in the hands of resident or nonresident owners, . . . and compelling the corporation to pay the tax on behalf of the shareholders, is not an unreasonable regulation." The court also holds that the Act of 1907, as amended by the Act of 1929, establishes the situs of the shares of a Pennsylvania trust company in Pennsylvania for the purpose of taxation within the meaning of the act. That case, construing our own taxing statute is binding upon this court. We adhere to our former conclusion in that respect.
2. The Commonwealth again asserts that the defendant must affirmatively show that the shares of stocks of other corporations which it insists are not taxable were purchased out of capital, surplus and undivided profits. We held that the defendant had that burden but that it might be shown in two ways: first, if the investment appears inherently as a part of the capital stock structure; and, secondly, if the investment is earmarked and set up as made out of the capital account. We adhere to that conclusion.
3. The Commonwealth earnestly insists that we have erred in prescribing a formula. The Commonwealth has always applied the equitable principle of endeavoring to determine what portion of the amount of permanent investments held by a trust company have been purchased out of capital, surplus and undivided profits where the fact did not affirmatively appear. The Commonwealth insists that since there is no statutory formula and the application of any formula to ascertain what proportion of the stock is exempt or taxable, is a gratuity, the court has no right to prescribe a formula. In our opinion we called attention to the fact that taxes must be settled according to equitable principles. Three appeals involving the taxation of this defendant for the years 1928, 1929 and 1930 were tried together. One kind of a fraction was used in the settlement for the taxes of 1928 and 1929 and a different fraction was used for 1930. We held that they could not both be right. But the Commonwealth now contends that if they are both equitable the court cannot interfere, provided it was the fraction uniformly used for the year in question. We are of opinion that the Commonwealth should use a fraction which is as near as possible scientifically correct, and not flop around from year to year by changing it. That led us to prescribe a formula.
One of the serious objections which the Commonwealth makes to that formula is to the denominator. In 1928-1929 the Commonwealth took as the denominator the permanent investments at the book value. That we say was correct. In 1930, however, the Commonwealth changed the formula by making the denominator all assets at market value, which we say is fundamentally wrong.
It must be kept in mind that the thing to be accomplished is the taxation of the shares of stock at actual value. Who are to be taxed? The stockholders. The thing to be taxed is what the stockholders own. A trust company has both stockholders' and depositors' money, but the depositors' money is not taxed. It may vary in amount but it does not vary in value, while the shares of stock vary in value. We have heretofore concluded that it may be presumed, from the experience of trust companies, that the permanent investments such as stocks and bonds are made out of the capital stock structure, while the short term investments such as notes are made out of deposits. Why should the depositors' money, which is included in all the assets, be included to determine what the stockholder should pay? A simple illustration will demonstrate the fallacy of such proposition. Let us assume that a trust company has $100,000 capital, surplus and undivided profits, and $400,000 permanent investments. It goes without saying that not more than one-fourth of these investments could be purchased out of the stockholders' money, so that the capital, surplus and undivided profits, as the numerator, over the permanent investments as the denominator, would make one-fourth at book value. The proposition contended for by the Commonwealth is that we should take all assets at the market value. Let us assume that this $100,000 of capital, surplus and undivided profits was worth $200,000 market value and all the assets at market value were worth $600,000. The $200,000 as the numerator and $600,000 as the denominator would indicate that one-third, or $133,333 had been purchased out of stockholders' money. In other words, the capital investments would be $33,333 more than the total capital. We think that further discussion is unnecessary to demonstrate that, whatever fraction is used, permanent assets should represent the denominator. We have already called attention in our former opinion to the fact that the apportionment principle has twice been approved by the Supreme Court; first, in the case of Com. v. Hazlewood Savings and Trust Co., 271 Pa. 375, and again in Com. v. Schuylkill Trust Co., 315 Pa. 429. In the first case permanent investments were used as the denominator and in the second case total assets were used. No question was raised as to the correctness of the formula. The only question was as to whether the proportionate taxation was proper.
A very much more serious question is what the multiplicand should be. This is so serious and difficult that we have had two arguments on the exceptions concerning it. The statute, as amended in 1927, provides for a tax of five mills upon the actual value of the shares, "the actual value of each share of stock to be ascertained and fixed by adding together so much of the amount of capital stock paid in, surplus and undivided profits as is not invested in shares of stock of other corporations liable to pay to the Commonwealth a capital stock tax, or relieved from payment of capital stock tax or tax on shares, and dividing the amount by the number of shares."
The difficulty revolves around the proper construction of the word "relieved." The language "relieved from payment of capital stock tax or tax on shares" was inserted by the Act of 1927. Does the word "relieved" mean relieved in any way by law or relieved only by the statutes of this State? We came to the latter conclusion in our previous opinion. We now review that conclusion. We must keep in mind the following principles extracted from Callery's App., 272 Pa. 255, and quoted in our opinion in Com. v. Girard Trust Co., 26 Dauph. 216, 218:
"5. It is the policy of the State that all property, unless specifically exempt, should bear its fair share of taxation. But double taxation is not permitted except when imposed by clear and positive language.
"6. No tax can be collected in the absence of a provision clearly imposing it upon the class to which the taxpayer or his property belongs.
"7. Where the taxpayer or his property is within the general language of the statute imposing the tax, all exempting provisions are to be strictly construed against the claim for exemption."
The Act of 1907 imposing this tax upon trust companies provided that the value should be ascertained by taking so much of the capital stock structure "as is not invested in shares of stock of corporations liable to pay to the Commonwealth a capital stock tax or tax on shares."
In Com. v. Hazlewood Trust Co., 23 Dauph. 244, 271 Pa. 375, it was contended that the trust company was exempt from tax on its investment in the stock of a manufacturing corporation to the extent that the manufacturing corporation was exempt from tax on its capital stock. Judge SADLER, specially presiding, rejected this contention. He said, inter alia:
"There can be no doubt that the legislature had the right in determining its sources of revenue to provide for such exemption, and it is to be noted that there is an express exception in all the acts taxing personal property from 1889, which reads as follows: 'Except shares of stock in any corporation or limited partnership liable to the capital stock tax imposed by the 21st section of this act, or relieved from the payment of tax on capital stock by said section': Act of June 1, 1889, P. L. 420, section 1; Act of June 8, 1891, P. L. 229, section 1; Act of June 17, 1913, P. L. 507, section 1.
"When, however, we come to the acts of assembly taxing banks (Act of July 15, 1897, P. L. 292) and trust companies (Act of June 13, 1907, P. L. 640) we find a change of phraseology in defining the exemption, and the sole deduction to be made in the latter case is of the value of the stocks which are liable to pay to the Commonwealth a capital stock tax or tax on shares. The wording of these acts of assembly is significant. The legislature could, if it saw fit, permit deductions of the stock engaged in manufacturing in the State, and it did so expressly in the first three acts referred to, but it was not bound to grant such an exemption, and did not make in words such an allowance in the Act of 1907, with which we are at present concerned."
It will be noted that the exemption claimed in the Hazlewood Savings and Trust Company Case was as to the stock of manufacturing corporations. But no amendment was made pursuant to that case decided in 1921. In the case of Com. v. Girard Trust Co., 26 Dauph. 216 (1923), that company claimed a flat exemption on the stock of the Pennsylvania Railroad Company which paid a capital stock tax on 80%, and on the stock of the Mahoning Shenango Ry. Co., which paid a capital stock tax on 83%, but were relieved of 20% and 17% respectively because the property, to that extent, was beyond the reach of the taxing power of the State. It was again held that they were not entitled to such deduction because the statute only gave a deduction to the extent that the corporations had paid a capital stock tax. The latter case was not appealed. What, then, can be predicated on the history of the amendment in the Act of 1927? It was not inserted following a decision that a trust company was not relieved on its holdings of a manufacturing company's stock. If it had been, the inference would have been much easier to draw. The amendment came only after a decision refusing a deduction for the stock beyond the power of the State to tax. Moreover, as Judge SADLER pointed out, the language of the Act of 1907 was significant. So, also, the language of the Act of 1927 is significant. The words are not "relieved by any act of this Commonwealth." There is no limitation such as is found in the language used in the acts to relieve from the payment of tax on personal property. The language is general: "relieved from the payment of capital stock tax or a tax on shares." When we view the matter from another angle, is the word "relieved" used as an active or passive verb in the act? We think there is nothing to indicate that it is used in the active sense, meaning that there is some relief specifically granted by an act of assembly of Pennsylvania. It appears to be used in the passive and broader sense. To approach the matter from still another angle, is this an exemption from taxation or an exception to the right to tax? This may be somewhat of a refinement of language but the language is that the right to tax shall be upon "so much of the amount of capital stock . . . as is not invested in the shares of corporations liable to pay . . . or relieved from payment." So that there never was a right to a tax upon the investment of the capital stock of such corporations. It seems that this is an exception to the right to tax rather than exempting something which otherwise would be taxed. We cannot escape the conclusion that if the legislature had intended to limit the word "relieved" to such relief as is granted by an act of assembly, it would have done so, as it did in the personal property acts above referred to in Com. v. Hazlewood Trust Co., supra. We are, therefore, of opinion that we must reverse our former conclusion and now hold that this language prevents the taxation of so much of the shares of the defendant company as is invested in the stock of corporations which are relieved from the payment of a capital stock tax either because of some provision of an act of assembly or because they are beyond the power of the State to tax.
It may be suggested that this conclusion is contrary to the case of Com. v. Schuylkill Trust Co., 38 Dauph. 22, 315 Pa. 428, but in that case the appellant contended that the full value of Philippine bonds and Joint Stock Land Bank bonds should be deducted because it was there insisted that the tax was a tax on property of the trust company and not a tax on its shares. The precise question which we have before us was not raised. The value of the shares might include value of federal securities without violation of the federal Constitution. In any event, the securities involved in the Schuylkill Trust Company Case were bonds and not shares of stock of corporations.
This conclusion sustains our former finding as to the multiplicand of the fraction to be applied to ascertain the taxable value of the shares of other corporations owned by the defendant. If we had concluded, as urged by the Commonwealth, that a trust company is only entitled to an exemption to the extent that the corporation issuing the stock has paid the tax it would necessarily have followed that the multiplicand would only be the taxed value and not the book value of such shares. If the Provident Trust Company is relieved both on the proportion in which the shares pay tax and also on the proportion from which no tax is collectible, then the whole book value of the shares should go into the multiplicand. After obtaining the quotient by using book values throughout the whole fraction, the actual value of the shares is accurately obtained by either adding or subtracting, as the case may be, the difference between the book value and the actual value.
4. It follows from our conclusion that we were in error in including the value of 9,276 shares of the Federal Reserve Bank of Philadelphia. If those shares are relieved under our present construction of the statute they must be taken out of the calculations, because the act of Congress prohibits any state taxation upon those shares.
For the reasons given above we must sustain defendant's exceptions Nos. 2, 7 and 10, and Commonwealth's exception No. 22. We have overruled each of the other exceptions filed by both parties. Our conclusions result in a statement, indicating a total tax of $52,794.30 on account of which there was paid $51,606.90, leaving a balance of $1,187.40 which, with interest and attorney general's commission, amount to $1,446.25.
Judgment is hereby directed to be entered in favor of the Commonwealth and against the defendant in the sum of $1,446.25.
Commonwealth appealed.
Errors assigned, among others, were various conclusions of law.
Philip S. Moyer, with him Charles J. Margiotti, Attorney General, for appellant.
George Ross Hull, of Snyder, Hull, Hull Leiby, with him MacCoy, Brittain, Evans Lewis and Morgan, Lewis Bockius, for appellee.
The judgment in this case is affirmed on the final opinion of President Judge HARGEST.