(78 Hun, 63.)

#### PEOPLE ex rel. SINGER MANUF’G CO. v. WEMPLE, Comptroller.

(No. 2.)

(Supreme Court, General Term, Third Department.

May 8, 1894.)

Taxation—Foreign Corporations.

Under Laws 1880, c. 542, § 11, providing that foreign corporations shall be taxed on the amount of capital stock employed within the state, a foreign corporation is not taxable on undivided profits invested in land within the state. Mayham, P. J., dissenting.

Certiorari by the Singer Manufacturing Company, a foreign corporation, to review an assessment of taxes made by Edward Wemple, comptroller'of the city of New York, under the law of the year ending November 1,1890.

Reversed.

Argued before MAYHAM, P.J., and PUTNAM and HERRICK, JJ.

Lowrey, Stone & Auerbach (Julien T. Davies and Wm. A. Poste, of counsel), for relator.

T. E. Hancock, Atty. Gen. (John W. Hogan, of counsel), for re-, spondent.

PUTNAM, J.

There is no dispute between the parties as to the facts of this case. The relator is a foreign corporation, with a paid-up capital of $10,000,000, on which, for the year ending November 1, 1890, a dividend of 12¿ per cent, was declared. Of that capital, during said year, $372,397.10 was employed in the state in the business of the corporation. During the last six months of the same year,, relator invested $900,000 in real estate in the city of New York, and which was purchased with its undivided profits or surplus. The comptroller, claiming that he was authorized so to do, under the provisions of chapter 542, Daws 1880 (as amended by chapter 361, Laws 1881; chapter 151, Laws 1882; chapters 359, 501, Laws 1885; and ■chapters 193, 353, Laws 1889), assessed the tax authorized by said act upon the amount of capital stock employed by relator in this state as aforesaid, viz. $372,397.10, and also upon said surplus of $900,000, so invested in real estate.

The only question submitted is whether the comptroller was authorized to include in the assessment against relator said real estate-so purchased by it with its surplus or undivided profit. If he could legally make such assessment, his authority must be found in the statutes above referred to.

Section 1 of the act of 1880, as amended, provides as follows:

> “Hereafter it shall be the duty of the president or treasurer of every * * * •corporation * * * liable to be taxed on its corporate franchise or business, as provided in section 3 of this act, to make a report in writing to the comptroller, annually, on or before the fifteenth day of November, stating *93specifically the amount of capital paid in, the date, the amount, and.rate per centum of each and every dividend declared by their respective corporations * * » during the year ending with the first day of said month.”

The section further provides that in any year when any such corporation shall fail to malee a dividend, or make one less than 6 per cent, on the par value of its capital stock, the officers of the corporation shall, between the 1st and 15th of November, forward to the comptroller a certificate containing a statement of the cash value of the capital stock of said company, at a sum not less than the average price said stock sold for during said year.

Section 3 of said act provides as follows:

> “Every corporation, * * * now or hereafter incorporated, organized or formed under, by, or pursuant to law in this state or in any other state, or country, and doing business in this state, except * * *, shall be liable to and shall pay a tax, as a tax upon its franchise or business, into the state treasury annually, to be computed as follows: If the dividend or dividends made or declared by such corporation, * * * during any year ending with the first day of November, amount to six or more than six per centum upon the par value of its capital stock, then the tax to be at the rate of % mill upon the capital stock for each one per centum of dividends so made or declared; or if no dividend be made or declared, or if the dividend or dividends made or declared do not amount to six per centum upon the par value of said capital stock, then the tax to be at the rate of one and 1-2 mills upon each dollar of the valuation of the said capital stock made in accordance with the provisions of the first section of this act.”

Section 11 provides as follows, viz.:

> “The amount of capital stock which shall - be the basis for tax under the provisions of section 3 of this act, in the case of every corporation * * * liable to taxation thereunder, shall be the amount of capital stock employed within this state. In making to the comptroller the report in writing or certificate of estimate and appraisal of the capital stock of such corporation * * * provided for by the first section of this act, it shall be the duty of the president or treasurer thereof, as the case may be, to state specifically the amount of capital stock employed within this state, of such corporation. ■ * * * Whenever the comptroller is dissatisfied with such report * * * of any corporation * * * whose capital is only partially employed within this state, he is authorized and empowered to ascertain, fix and determine the amount of capital employed within this state, and to settle and account for the taxes and penalties due the state thereon.”

In my view, under tbe above provisions of the act of 1880 and the acts amendatory thereof, the action of the comptroller in assuming to assess the $900,000, surplus moneys invested by relator in real estate, was unauthorized. The statute only authorizes the comptroller to levy a tax upon the capital stock of a corporation. It will be observed that by the provisions of section 11, above quoted, the basis of the tax against every corporation under the provisions of section 3 of the act shall be the amount of its capital stock employed within this state. Section 11, supra, leaves in force the provisions of section 3, except in limiting the franchise tax, authorized by the act, to capital stock employed within the state. Section 3, above quoted, provides that, if a dividend of 6 per cent, or upward is made by a corporation during any year ending November 1st, the tax shall be at the rate of one-fourth mill upon the capital stock of the corporation for each 1 per cent, of dividend so made. If no dividend is made, or one less than 6 per cent, on the par value of the *94capital stock of the corporation, then the tax is to be at the rate of 1-J mills upon every dollar of the valuation of the said capital stock made in accordance with the provisions of the first section of the ¡act. Section 1, as we have seen, provides for an appraisal of the value of the capital stock of the corporation at its actual cash value where no dividends have been declared, or a dividend less than 6 per cent. The act in question, then, only provides for a tax against relator to be assessed upon its capital stock. It did not authorize the comptroller to assess the corporation on its surplus or undivided profits. In Williams v. Telegraph Co., 93 N. Y. 162-188, Judge Earle discusses the meaning of the words “capital stock” as follows, viz.;

> “The "‘capital stock,’ in this section, does not mean share stock, but it means "the property of the corporation contributed by its stockholders, or otherwise obtained, by it, to the extent required by its charter. While the term ‘cnp'tal (Stock’ is frequently used in a loose and indefinite sense in this section and in legal phrase generally, it means that, and no more. In State v. Morristown Fire Ass’n, 23 N. J. Law, 195, Green, C. J., said: ‘The phrase “capital stock” Is very generally, if not universally, used to designate the amount of capital to be contributed for the purposes of the corporation. The amount thus contributed constitutes the “capital stock” of the company.’ In Burrall v. Railroad Co., T5 N. Y. 211, Folger, J., defined ‘capital stock’ as ‘that money or property which is put in a single corporate fund by those who, by subscription therefor, become members of a corporate body.’ In Barry v. Exchange Co., 1 Sandf. Oh. 280, Vice Chancellor Sand ford said: ‘The capital stock of a corporation is, like that of a copartnership or joint-stock company, the amount which the partners or associates put in as their stake in the concern.’ By loss •or misfortune, or misconduct of the managing officers of a corporation, its capital stock may be reduced below the amount limited by its charter; but whatever property it has up to that limit must be regarded as its capital stock. When its property exceeds that limit, then the excess is surp'us. Such ■surplus belongs to the corporation, and is a portion of its property, and, in a general sense, may be regarded as a portion of its capital, but, in a strictly legal sense, it is not a portion of its capital, and is always regarded as surplus profits.”

See, also, Barclay v. Culver, 30 Hun, 1-5; State Bank of Wisconsin v. City of Milwaukee, 18 Wis. 281.

As suggested above, the only authority which the comptroller possessed to tax the relator was derived from the statutes above referred to and quoted, and those acts only authorize him to assess relator’s capital stock, and not its undivided surplus. It is true that section 11, supra, of the act, after providing that the basis of the tax against a corporation, under the provisions of section 3 of the act In question, shall be the amount of capital stock employed within the state, and that the corporation, in making its report to the comptroller, shall report the amount of capital stock so used in the state, rases the word “capital” twice in the section instead of “capital stock.” But it will be observed that it only authorizes the assessment upon the capital stock of the corporation, and in sections 1 and ■3 of the act the tax authorized is also to be assessed on “capital ¡stock” of the corporation. I cannot believe that it was the intent of those who framed the statutes in question to authorize an assessment by the comptroller on the undivided profits or surplus or the ■corporations mentioned therein. If relator, during the year in ques*95tian, had only paid a dividend of 5 per cent., the tax under section 3 of the "act would have been 1-| mills upon each dollar of the valuation of its capital stock made in accordance with the provisions of section 1 of the act. It seems to me that the language contained in section 3 necessarily limited the tax to the capital stock, and precluded the idea of an assessment on the surplus. Under section 1 the valuation of the stock is to be its actual value in cash, and not less than the average price said stock sold for during the year. The surplus, which the comptroller taxed, increased the value of the capital stock, which under the act is assessed. If the position of the respondent can be sustained, a corporation can be taxed on its surplus and on its stock, which is increased in value by such surplus. To illustrate: A corporation has a capital stock of a million, and a surplus of equal amount, and makes a dividend of 5 per cent, per annum, all its capital stock and surplus being employed within this state. In consequence of the large surplus the capital stock of the corporation is worth $2,000,000. The corporation then, according to the position taken by the comptroller, must pay the franchise tax assessed on the surplus of $1,000,000, and also on the value of its capital stock, which is doubled in consequence of such surplus. The effect of such a procedure must necessarily be to compel the corporation to pay a double tax on its surplus. In the case supposed, the surplus or undivided profits, under the acts in question, are taxed by the assessment of the capital stock of the corporation at its market value. The surplus necessarily increases the value of the stock, and the comptroller, in assessing the increase in value, taxes the surplus. To continue our illustration: A corporation with a capital stock of one million, and a surplus of like amount, all employed in this state, during the year expiring November 1st, has made a dividend of 12J per cent, on the par value of its capital stock. Now, it is clear that the dividend is increased in amount, perhaps doubled, by the surplus; and hence the franchise tax assessed by the comptroller under the provisions of section 3, supra, is increased, perhaps doubled. Therefore, whether a corporation pays a dividend of 6 per cent, or upward, or not, the surplus is necessarily taxed by the comptroller in assessing the franchise tax in question, because the surplus necessarily increases the income of the corporation, and hence the annual dividend, and also increases the market value of its capital stock.

I conclude that the capital stock referred to in the act of 1880 and acts amendatory thereto is capital stock authorized by the charter of the corporation, and subscribed or raised by its stockholders, on which it pays dividends, and which it is obliged to maintain intact; not the surplus or undivided profits owned by it, however invested, which it can at any time turn into money, and divide among the stockholders. This surplus or undivided profits, it is true, until divided, belongs to the corporation, increasing the value of the corporate stock; but it cannot be deemed capital stock, which can be assessed for the franchise tax authorized by the acts above mentioned. The views above stated render it unnecessary to consider the position taken by appellant that the surplus belonging to relator, so assessed by the comptroller, was not employed-in the state, within *96the meaning of section 11 of the act of 1880 and acts amendatory thereto. I think the determination of the comptroller should be reversed, with the usual costs.

HERRICK, J.

(concurring). When a foreign corporation, whose business is manufacturing, and the selling of its manufactured products, uses a portion of its surplus in the purchase of real estate, and holds the same as an investment, not using it in its business, I do not think that such purchase and holding is an employment of its capital stock within this state, within the meaning of the statute. “The basis of the tax is the amount or portion of its capital in use here in the transaction of its ordinary business.” People v. Wemple, 131 N. Y. 64, 29 N. E. 1002. The holding of the real estate, and the receiving of rentals therefrom, is no part of the ordinary business of the corporation. If the money so invested was not employed within this state, then it is not the subject of taxation here. People v. Telephone Co., 117 N. Y. 241, 22 N. E. 1057. The determination of the comptroller was therefore erroneous, and should be reversed.

MAYHAM, P. J.

(dissenting). The relator being a foreign corporation, doing business in this state, in its report to the comptroller for the year ending on the 1st of November, 1890, for the purpose of taxation, it stated the amount of capital stock.employed in the state of New York was $372,397.10, on which it was liable, under the Laws of 1880 and 1881, to a tax of $1,163.74. The comptroller, in addition to the sum reported, found that within the six months next preceding the 1st of November, 1890, the relator had employed within this state $900,000 capital, the tax on which would amount to the sum of $1,406.25, making the aggregate tax imposed by him $2,565.99. It seems conceded that this latter sum of $900,000 consisted of an investment by the relator, in April of that year, of about that amount in real estate in the city of New York, which it then held under leases for the purpose of its business. Notice of this assessment was given to the relator by the comptroller, whereupon the relator applied for a rehearing, which was granted; and on such rehearing the comptroller determined to readjust the tax, and affirmed the same, whereupon the relator sued out this writ of certiorari.

The principal question raised by the certiorari is whether the investment of this $900,000 of the surplus earnings of the relator is taxable under section 11 of chapter 542 of the Laws of 1880, as added by chapter 151 of Laws of 1882, and amended by chapter 501 of Laws of 1885. That section reads as follows:

> “The amount of capital stock which shall be the basis for tax under the provisions of section 3 of this act, in the ease of every corporation, joint stock company and association liable to taxation thereunder, shall be the amount of capital stock employed within this state. In making to the comptroller, the report in writing or certificate of estimate and appraisal of the capital stock of such corporation, joint stock company or association provided for by the first section of this act, it shall be the duty of the president or treasurer thereof, as the case may be, to state specifically the amount of capital stock employed within this state, of such corporation, joint stock company or association. Whenever the comptroller is dissatisfied with such report or certifi*97cate of estimate and appraisal, as the case may he, of any corporation, joint stock company or association whose capital is only partially employed within this state, he is authorized and empowered to ascertain, fix and determine the amount of capital employed within this state, and to settle an account for the taxes and penalties due the state thereon.”

Does this section authorize the comptroller to impose this tax on the surplus capital of a foreign corporation, doing business within this state, when the same is invested in real estate which is not used by the corporation in its business, but solely as a place of investment of its surplus earnings ? The power of the comptroller to impose a tax upon a foreign corporation doing business in the state is not questioned to the extent that its capital stock is employed in this state; but the learned counsel for the relator insists that there is a distinction between the term “capital stock” and capital represented by the surplus earnings of a corporation, and that, as the surplus earnings of the relator were used in the purchase of this real estate, the corporation, by the use of the same in the purchase of property in this state, did not employ its capital stock within this state. A distinction is thus sought to be drawn between the capital stock of a corporation, measured by the number of shares of the same at its par or nominal value, and the additions or accretions to the par value of such shares measured by its surplus earnings, and that, therefore, the use or investment of its surplus earnings in this state in the purchase of real estate is not the use of any part of its capital stock in this state. It can hardly be denied that, until dividends of the surplus earnings of a corporation are declared and paid to the shareholders, such surplus belongs to the corporation, and constitutes a part of its capital, and that its aggregate capital is represented by the shareholders of its capital stock. It would seem to follow, therefore, that the capital of a corporation is the amount of its aggregated assets, whether it consists of the paid-up capital of each individual share of stock, or the paid-up shares and the undivided accumulations of profits on the business. If this reasoning be sound, then the source from which the money is derived which was used by the corporation in this state for the purchase of this real estate is immaterial, as it would be the employment of the capital stock in ihis state, whether the funds received for the par value of the original stock or from the net profits of its business. In either event, it would be the lawful employment of the company’s capital stock in this state, and hence the subject of assessment and taxation.

The case of People v. Wemple, decided by this court, and reported in 14 N. Y. Supp. 859, which was affirmed in the court of appeals in 129 N. Y. 558, 29 N. E. 812, seems to be analogous in principle to the one under consideration. It is true that the relator in that case was a domestic corporation; but it became important in the decision of that case to consider what constituted the employment of capital in this state, and it was held that the balance of funds kept on deposit in bank in this state, the amount of rent paid for premises occupied by the relator in this state, and the salaries paid to the officers of the corporation therein, could properly be regarded by the comptroller as capital employed in this state, for the purpose of *98fixing the amount of tax to be imposed on the corporation. The words “capital” and “capital stock” seem, in section 11 of the act of 1885, to be used interchangeably. In that portion of the section imposing upon the president or other fiscal officer the duty of the corporation to malte a report the words “capital stock” are used; and in the part of the section requiring the comptroller to make the assessment the word “capital” is used. For the purpose of this act, therefore, we think the words “capital stock” and “capital” were treated by the legislature as equivalent or synonymous, and employed in the same sense, and mean all the property of the corporation which it may properly use or invest in any business or pursuit in which it may lawfully use its capital or assets. We are also of the opinion that the purchase by the relator of these pieces of real estate, on which, at the expiration of the existing leases thereon, it intended to erect new buildings, to be used in part as offices for the company and “for the office requirements of the company,” as appears in folio 32 of the case, was such an employment of the capital of the relator in this state as to bring it within the jurisdiction of the assessing and taxing power of the comptroller. It is true that the court of appeals in the case of People v. Wernple, 131 N. Y. 68, 29 N. E. 1002, say: “The basis of the tax is the amount or portion of its capital in use here in the transaction of its ordinary business.” In that case, however, it was held that a corporation of another state, which engaged in a manufacturing business, maintained a sales agency in this state, with a warehouse for its manufacturing, sold a portion thereof in the state, and kept large sums of money on deposit in the state, was doing business within the state, within the meaning of this taxing act. The court also in that case says: “How much that [tax] may be in any particular case is generally a question of fact to be determined by the comptroller, under the procedure pointed out by the statute.”

The court also in this case holds that when a corporation of another state employs any portion of its capital here, and thus has the benefit and protection afforded by the laws of this state, to the extent of the capital employed, there is no reason why it should not be burdened by state tax to the same extent as a domestic corporation. In the case of People v. American Bell Tel. Co., 117 N. Y. 241, 22 N. E. 1057, cited by the relator, the court held that it was not employing any of its capital in carrying on business in this state. It was a Massachusetts corporation, created under the laws of that state, with its office in Boston, where it made all of its contracts with independent corporations in this state, such corporations paying all the rental or royalty growing out of the contractual relation to the defendant in Boston, so that none of its capital was used or employed in this state; and Buger, J., says: “The Bell Telephone Company has no office or office agent or employe in the state of New York, unless the local corporations can be so denominated.” He then proceeds to show that the local corporations bear no such relation. We do not think that case is an authority against the validity of the tax imposed in the case at bar. Nor do we think that the *99contention of the relator that the imposition of this tax upon, the capital of the relator employed in the purchase of this real estate will subject the property of the relator to double taxation can be considered, and taken as a ground for reversing the determination of the comptroller in this case. The power of the legislature to impose terms upon which foreign corporations may do business in this state is not disputed, and, under the authorities in this state and in the federal courts, cannot well be questioned, so long as they do not violate the federal constitution or law regulating interstate commerce. The court cannot, therefore, relieve the relator from this tax, on the equitable ground that it is a double taxation, so long^ as the use of its capital in this state makes it the subject of taxation by the comptroller, under the provisions of section 11 of chapter 501 of Laws of 1885. We are therefore of the opinion that the assessment made by the comptroller was correct, and should be confirmed. Assessment of comptroller confirmed, and writ of certiorari quashed, with $50 costs and disbursements to the respondent.