Opinion
May 24, 1965.
January 17, 1966.
Taxation — Commonwealth — Shares tax — Actual value of shares — Determination — Act of July 15, 1897, P. L. 292.
In this appeal by a taxpayer in which it challenged the Commonwealth's computation of its shares tax for 1959 (imposed by the Act of July 15, 1897, P. L. 292, as amended, "at the rate of eight mills upon each dollar of the actual value" of the shares), in which it appeared that the Commonwealth valued FHA and VA mortgages held by the taxpayer at their face book value rather than at their temporarily depressed market value, and the taxpayer contended that it should be permitted to set the actual value at the appraised market value, it was Held, in the circumstances, that the Commonwealth had correctly determined the actual value of the shares by using the book face mortgage value.
Mr. Justice EAGEN concurred in the result.
Mr. Chief Justice BELL filed a dissenting opinion.
Before BELL, C. J., MUSMANNO, JONES, COHEN, EAGEN, O'BRIEN and ROBERTS, JJ.
Appeal, No. 25, May T., 1965, from judgment of Court of Common Pleas of Dauphin County, No. 395 C.D. 1962, in case of Commonwealth of Pennsylvania v. Mellon National Bank and Trust Company. Judgment affirmed; reargument refused March 24, 1966.
Appeal by taxpayer from tax settlement by Board of Finance and Revenue. Before KREIDER, J.
Appeal dismissed, defendant's exceptions dismissed and judgment entered for Commonwealth. Defendant appealed.
Carl F. Chronister, with him A. Sieber Hollinger, William T. Marsh, and Reed, Smith, Shaw McClay, for appellant. George W. Keitel, Deputy Attorney General, with him Walter E. Alessandroni, Attorney General, for Commonwealth, appellee.
Charles J. Biddle, with him Leslie M. Swope, and Drinker, Biddle Reath, for amicus curiae.
This is an appeal by Mellon National Bank and Trust Company (Mellon) with respect to its shares tax report for the year 1959. The shares tax is imposed by the Act of July 15, 1897, P. L. 292, as amended, 72 P. S. § 1931, and is "at the rate of eight mills upon each dollar of the actual value" of the shares.
In computing its shares tax for 1959, Mellon added its capital stock, surplus and undivided profits as shown on its books. To this it added its federal tax reserve for losses on loans and discounts and arrived at a total of $306,541,525.84. Mellon then subtracted (1) the difference between the book and market values of its securities ($429,112) and (2) the average reserve for its actual losses on loans and mortgages ($37,154) and (3) the difference between the book and market values of its FHA and VA mortgages ($11,203,012.72). This resulted in a taxable value of $294,872,247.12, and a per share taxable value of $115.26. The value of exempt shares — $21,002,907.72 — was then subtracted, leaving a value subject to tax of $273,869,339.40 and a tax of $2,190,954.71.
The computations referred to herein are those submitted by each party following the trial in the court below and reflect certain changes from the computations contained both in the original report and in the settlement.
The Commonwealth disputed the taxpayer's computation in two respects. First, it disallowed the subtraction of the $11,203,012.72 difference between the book and "market values" of the FHA and VA mortgages; and, second, it added back an amount of $137,639 representing the total discount on certain mortgages purchased by Mellon from others and shown on its books as a liability. These two changes produced a total actual value of $306,212,989 and, after eliminating the value of the exempt shares, a taxable actual value of $284,402,747. The tax on this value came to $2,275,221.98.
The court below agreed with the Commonwealth, and Mellon has appealed.
In reducing the book value of its FHA and VA mortgages, Mellon relied on an appraisal made for it by an independent national mortgage broker. This appraisal indicated that there existed a substantial and well-defined market throughout the country for FHA and VA mortgages and that as of December 31, 1959, market values were quite depressed, principally because of the issuance by the United States Government of a high interest rate bond which attracted much of the money which normally would be available to purchase FHA and VA mortgages. The result of this depressed state of the market was to reduce temporarily the market value of the FHA and VA mortgages held by Mellon to about 84% of their face book value. The facts further indicate, however, that Mellon has had to foreclose on only a negligible percentage of the FHA and VA mortgages held by it and that it sold none of them in 1959 (or in 1960 and 1961), thus indicating that Mellon generally held a mortgage until maturity and received the face value therefor. In the light of these factors which indicate that the FHA and VA mortgages had an actual value to Mellon equal to their face value, Mellon nevertheless contends that it should be permitted a reduction and to set the actual value at the appraised market value.
In Commonwealth v. Butler County National Bank, 376 Pa. 66, 101 A.2d 699 (1954), we upheld the Commonwealth's action in adding unrealized appreciation based upon current market values to the cost of certain investment securities in order to determine the "actual value" of the bank's shares. We concluded that such an addition contributed to a more accurate determination of the actual value. But the point in that decision, as well as in the earlier case of Commonwealth v. Union Trust Co., 237 Pa. 353, 85 A. 461 (1912), was that the taxing officials must view each case with a single purpose, that of determining the "actual value" of the shares.
It was strongly contended by the appellant in Commonwealth v. Butler County National Bank, supra, that the Legislature by the Act of 1897 intended that the fiscal officers of the Commonwealth should determine the amount of capital stock paid in, the surplus and undivided profits only from the books of the bank provided the books are kept in accordance with proper accounting procedures (which would not permit banks to consider and reflect on their books unrealized appreciation of assets). We held that, since the Act lays the tax on the "actual value" of the bank shares, the Commonwealth's fiscal officers are not restricted to only what the bank books show and that the fiscal officers are not prohibited from ascertaining independently what the capital stock paid in, the surplus and undivided profits of a taxpayer bank actually amounted to. Of course, since the fiscal officers are not restricted to the books of the taxpayer bank in determining the actual value of the bank shares, it is quite proper for a taxpayer bank itself to go outside its books in order to determine the actual value of its shares.
The taxpayer here has gone outside of the books and seeks to value its VA and FHA mortgages in the same manner that marketable securities are valued. Even accepting the taxpayer's contention that the evidence would establish the existence of a nationwide market or exchange for VA and FHA mortgages, however, we find nothing in the Act of 1897 or our prior decisions which requires the fiscal officers of the Commonwealth to accept the values prevailing in this market unless doing so contributes to a more accurate determination of the actual value of Mellon's shares. Considering the facts that Mellon's actual experience does not justify any such conclusion, that conventional mortgages (those mortgages other than VA and FHA) would continue to be valued at their book values, and that the depressed values testified to seem to have been a product of an unusual and temporary market situation rather than a symptom of some real loss in value, we must conclude that the Commonwealth's procedures for taxing VA and FHA mortgage loans at book value contributes to a more accurate determination of the actual value of the Mellon's shares.
In view of our conclusion in this matter, it follows that the Commonwealth was also correct in adding back the $137,639 in discount on the mortgages purchased from other lenders. Only in this way is their face value reflected in the computation of tax.
The judgment of the court below is affirmed.
Mr. Justice EAGEN concurs in the result.
I believe that the Mellon National Bank and Trust Company accurately determined and computed the actual value of its shares of stock in its Shares Tax report for the year 1959. The Commonwealth has no legal or moral right to ascertain the " actual value" of a bank's capital stock by use of market value when that method of determination of value is to its advantage, but to ascertain actual value on the basis of book value when that method of valuation would be more profitable taxwise. The Commonwealth produced no testimony which would justify (1) its valuing FHA and VA mortgages at face value when there was an active market for such securities, which was substantially below face value, and (2) its use of an entirely different yardstick, i.e., market value, for valuing all other marketable securities. The Commonwealth cannot blow hot and cold unless there be some factual or legal justification for differentiating one type of marketable asset from another.
Required by the Act of July 15, 1897, P. L. 292. as amended, 72 P. S. § 1931 et seq., for Banks and Savings Institutions, and the Act of June 13, 1907, P. L. 640, as amended, 72 P. S. § 1991, for Title Insurance and Trust Companies.
The Commonwealth's contentions are negated by Commonwealth v. Butler County National Bank, 376 Pa. 66, 101 A.2d 699; and by Commonwealth v. Trust Company of Pittsburgh, 237 Pa. 353, 85 A. 461, which held that market value had to be used when such value was greater than book value.
For these reasons, I dissent.