Opinion
May 22, 1939.
June 19, 1939.
Taxation — Corporate loans — Bonds issued by city — Payment of interest — Improvement bonds — Assessment against properties — Obligation not primarily debt of corporation — Acts of June 17, 1913, P. L. 507; July 15, 1919, P. L. 955, and July 13, 1923, P. L. 1085.
1. Under the Act of June 17, 1913, P. L. 507, as amended by the Acts of July 15, 1919, P. L. 955, and July 13, 1923, P. L. 1085, a city is liable for a tax upon improvement bonds issued by it, payable out of assessments levied against the properties benefited, carrying interest payable by the city. [204]
2. Under the Act of 1913, as amended, where a corporation (1) issues bonds or (2) assumes bonds or (3) pays the interest on them, they are taxable for state purposes, even though the obligation is not primarily a debt of the corporation paying the tax. [204-5]
3. The holder of the evidence of indebtedness primarily owes the tax; the treasurer of the corporation is the agent of the Commonwealth to collect the tax. [206]
Argued May 22, 1939.
Before KEPHART, C. J., SCHAFFER, MAXEY, DREW, LINN, STERN and BARNES, JJ.
Appeal, No. 13, May T., 1939, from judgment of C. P. Dauphin Co., 1933, No. 347, Com. Docket, in case of Commonwealth v. City of Harrisburg. Judgment affirmed.
Appeal by city from settlement of loans tax by Department of Revenue.
The facts are stated in the opinion of the lower court, by HARGEST, P. J., as follows:
This case comes before us upon an appeal from a settlement by the Department of Revenue, approved by the Auditor General's Department June 16, 1933, of a tax on loans, for the years 1928, 1929 and 1930.
For the year ending December 31, 1928, the account was settled for $15,219.15, upon which the amount of $13,301.99 has been paid, leaving in controversy $1,917.16. For the year ending December 31, 1929, the account was settled for $15,801.72, upon which $13,728.55 has been paid, leaving $2,073.17. For the year ending December 31, 1930, the account was settled for $14,597.20, upon which $12,375.17 was paid, leaving $2,222.03.
A stipulation as to facts and to try the case without the intervention of a jury, pursuant to the Act of April 22, 1874, P. L. 109, has been filed.
FACTSFrom the stipulation it appears that the City of Harrisburg filed with the Secretary of Revenue a corporate loans report for the calendar years 1928, 1929 and 1930, upon which the accounting officers settled an account, taking the average valuation of loans outstanding for those years as $3,836,469, $3,982,844, $3,680,200 respectively, and the tax of 4 mills less the treasurer's commission are the amounts heretofore stated. Included in the total amount of loans were improvement bonds of the City of Harrisburg issued for paving and grading amounting to $481,700 for the year 1928; $520,900 for the year 1929; $558,300 for the year 1930, upon which the tax less the treasurer's commission is as above stated.
A sample bond attached to the stipulation shows that it is entitled "Improvement Bond," and provides:
"The City of Harrisburg will pay to bearer the sum of $100 payable on the first day of January 1939 or sooner, at the option of the said City with interest at the rate of 5 percentum per annum, clear of all taxes, payable semi-annually on the first day of January and July in each and every year, at the treasury of the City of Harrisburg, on presentation and surrender of the proper coupons hereunto annexed."
The bond provides that it is issued pursuant to the Act of the General Assembly and Ordinance of the City referred to, "authorizing the paving of 25th Street from Derry to Greenwood, and rests only and is payable out of the assessments levied against the properties benefited by the said local improvement, and from no other fund."
DISCUSSIONThe question before us is whether, under the Act of June 17, 1913, P. L. 507, as amended by the Act of July 15, 1919, P. L. 955, and the Act of July 13, 1923, P. L. 1085, the City is liable for a tax upon the improvement bonds, payable out of assessments levied against the properties benefited. The Act of June 17, 1913, P. L. 507, as amended by the Act of July 15, 1919, P. L. 955, and the Act of July 13, 1923, P. L. 1085, provides:
"That all scrip, bonds, certificates, and evidences of indebtedness issued, and all scrip, bonds, certificates and evidences of indebtedness assumed, or on which interest shall be paid, by any . . . city . . . are hereby made taxable . . . at the rate of 4 mills on each dollar of the nominal value thereof."
The defendant contends that these improvement bonds, which are issued under the authority of Article XV, Section 27, of the Act of May 23, 1889, P. L. 277 (53 PS 11731), authorizing the issuance of such bonds "solely upon the assessments for any of said local improvements," is not a debt of the city and therefore the city is not liable for the tax. We agree that, under the cases of City of Chester v. Woodward, 33 Dauph. 59, and Tranter v. Allegheny County Authority, 316 Pa. 65, 84, 85, 86, these bonds are not a debt of the city.
But the question before us is not determined by whether or not the obligation is primarily a debt of the corporation paying the tax. The Act of 1919, as amended, provides that "all . . . bonds . . . issued and all . . . bonds . . . assumed, or on which interest shall be paid, . . . are hereby made taxable . . . for state purposes." It therefore clearly appears that if a corporation (1) issues bonds or (2) assumes bonds or (3) pays the interest on them, they are taxable for state purposes. In Commonwealth v. Megargee Bros., 275 Pa. 12, 16, the court said:
"The words 'or interest shall be paid,' do not appear in either sections 1 or 17 of the Act of 1913; hence we must assume they were inserted in the amendment of 1919 to cover some additional subject of taxation, especially as the disjunctive 'or' and not the conjunctive 'and,' is used to express the legislative intent. Thus viewed, they cannot properly be limited to instances where the corporation has 'issued' the obligations or 'assumed' a general liability for them; but must apply, exactly as the language states, whenever they are 'scrip, bonds, certificates and evidences of indebtedness . . . on which interest shall be paid.' This is a necessary deduction, for otherwise, the words 'interest shall be paid,' might just as well have been omitted from the statute, a conclusion not permissible, if reasonably avoidable, as it is here."
In Commonwealth v. Imperial Woolen Co., 290 Pa. 526, 528, the court said, answering an argument that "or" ought to be read as "and":
"The act, however, does not so read; it speaks of 'evidences of indebtedness issued' 'and evidences of indebtedness assumed or on which interest shall be paid.' In other words it classifies evidences of indebtedness of three kinds upon which the tax is to be paid; those that are issued by a corporation, those which are assumed by it and those on which it pays interest. If the conjunction 'and' were used instead of 'or,' there might be merit in appellant's contention, because it could then be argued with much plausibility that the phrase 'and on which interest shall be paid' is one modifying those which go before and that not only must the evidence of indebtedness be issued or assumed but interest must be paid on them before they are taxable. The act, however, is not so written as to sustain this argument."
In determining this question, we must not lose sight of the relation between the corporation and the Commonwealth. The corporation is not primarily the debtor for the tax. We reviewed at considerable length the history of the tax on loans in the case of Commonwealth v. Jacob Reed's Sons, Inc., 25 Dauph. 117. It was there pointed out that as far back as the Act of April 30, 1864, P. L. 218, the treasurer of the corporation was made the agent of the state, the collector of the state, for the purpose of collecting such taxes, and ever since then that duty has remained upon the treasurers of corporations. Maltby v. Reading and Columbia Railroad Co., 52 Pa. 140; The Delaware, Lackawanna Western Railroad Co. v. Commonwealth, 66 Pa. 64; Commonwealth v. Del. Div. Canal Co., 123 Pa. 594, construing the Act of June 30, 1885, P. L. 193, re-imposing such duty; Commonwealth v. Coal Iron Co., 137 Pa. 481; Commonwealth v. N.Y., L. E. W. R. R. Co., 150 Pa. 234; Commonwealth v. Barrett Manufacturing Co., 246 Pa. 301.
The collection of the tax, as the acts pointed out, required the treasurer to deduct the tax from the interest due to the resident owners of the bonds and pay the same over to the Commonwealth. If the treasurer failed to perform his duty the corporation became liable.
A practice early grew up of issuing bonds tax free, which, of course, meant that the corporation, instead of going into the intricate accounting of deducting the tax and forwarding the difference to those to whom interest was due, and perhaps for the purpose of making its bonds more salable, would itself pay the tax. In such a situation, the corporation said to the owner of the security, in effect, "We will pay you the full amount of the interest and will not deduct the tax." Such is the situation in the instant case. The City of Harrisburg has issued these bonds, in terms, "with interest at the rate of 5 per centum, per annum, clear of all taxes." It has agreed that it will not deduct from the holder of the bond the tax for which he is liable to the Commonwealth. The holder primarily owes the tax; the treasurer of the City of Harrisburg is the agent of the Commonwealth, to collect that tax. The City of Harrisburg agrees that its treasurer will not deduct the tax but that the City will pay the interest free of tax.
Assuming this is a bond which comes within the classes made taxable by the Act of 1919, there can be no escape from the conclusion that the city is liable for the tax, as it has already said in its contract with the one who owes it that he need not pay it but that the city itself will pay it.
The city comes within two of the three situations in which the Act of 1919 makes such bonds taxable. It has "issued" the bonds and it pays the interest on them. We see no escape from the conclusion that the city must, therefore, account to the state for the tax.
Counsel have argued that the validating Acts of April 11, 1929, P. L. 509, June 23, 1931, P. L. 929, and June 3, 1933, P. L. 1466, which, in terms, attempt to validate bonds and other obligations of municipalities issued for public improvement prior to their passage, and make such bonds the obligations of the municipality, are unconstitutional insofar as they attempt to impose the indebtedness of improvement bonds resting entirely upon the assessments upon the municipality itself. In the view we take, it is not necessary to discuss this question.
CONCLUSIONS OF LAW1. Improvement bonds of the City of Harrisburg issued by it, carrying interest payable by the city "clear of all taxes," upon which it has paid the interest, are "evidences of indebtedness," and are taxable within the meaning of the Act of Assembly imposing the tax on loans.
2. The City of Harrisburg is liable for such tax.
STATEMENT
Balance due (for the year 1928) $1,917.16 (for the year 1929) 2,073.17 (for the year 1930) 2,222.03 $6,212.36 ---------- With interest from August 12, 1933, being 60 days after the date of settlement .......... 776.54 --------- $6,988.90
Attorney General's commission of 5% ....................... 349.44 --------- Total ............... $7,338.34JUDGMENT
Now, September 24, 1935, judgment is hereby directed to be entered in favor of the Commonwealth and against the City of Harrisburg in the sum of $7,338.34, unless exceptions be filed within the time limited by law.
WM. M. HARGEST, P. J.
City appealed.
Error assigned, among others, was dismissal of exceptions.
Paul G. Smith, City Solicitor, with him Nathan Lehmayer, for appellant.
Frank A. Sinon, Deputy Attorney General, with him Claude T. Reno, Attorney General, for appellee.
The judgment of the court below is affirmed upon the opinion of President Judge HARGEST.