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Timestamp: 2019-04-25 13:21:34+00:00

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[296 U.S. 113, 114] Mr. John Robert Jones, of Philadelphia, Pa., for appellant.
Mr. Manuel Kraus, of Pittsburgh, Pa., for the Commonwealth of Pennsylvania.
The appellant, a trust company organized under the laws of Pennsylvania, challenges a statute of the state as construed and applied in the assessment of a tax for the year 1930, denominated a tax on shares. From a settlement made against the company by the Department of Revenue an appeal was taken to the court of common pleas of Dauphin county which, after trial without a jury, entered judgment in favor of the commonwealth. 1 The Supreme Court of Pennsylvania affirmed the judgment. 2 The appellant's contention is that the act as so construed and applied by the Department and the courts discriminates against United States government bonds, bonds of federal instrumentalities, and national bank stocks included in the appellant's assets. The appellee replies that the tax is upon the shares of stock as such, and not upon the assets which represent their value; that, in fact, no tax whatever, much less a discriminatory tax, has been levied upon exempt assets of the company.
Obviously, the theory of the amendments was that as trust companies, so long as they had been liable for capital stock tax, had been exempted from payment of tax reckoned upon assets which had already paid a tax or were exempt from tax, that is, the stock of corporations of Pennsylvania which had paid a capital stock tax or whose shares had been taxed or had been exempted from tax, it was proper, in levying a tax upon the shares of trust companies reckoned upon the net assets of those companies, to exempt from such net assets so much thereof as represented shares of corporations which had already paid a tax or, under the policy of the commonwealth had been exempted.
The impost, as laid by the act of 1907, was a true tax on shares, and not a tax upon the assets of trust companies. Such an exaction is not a tax upon United States securities owned by the corporation whose shares are taxed or upon securities exempt from taxation because issued by instrumentalities of the federal government. 8 [296 U.S. 113, 117] It will be observed that by the amendments to the act of 1907 the measure of the tax is not in any sense the value of the shares as such, but a value reflected by so much of the net assets as is not represented by shares of Pennsylvania corporations already taxed or exempt from tax. In the administration of the act as amended, the procedure which has been followed and approved9 is first to deduct the liabilities from the total assets, thus arriving at the net assets. The theory has been the exempt shares owned by the trust company must be shown to have been actually purchased out of capital stock or surplus in order to obtain a deduction of their full value from the gross assets. If the company is unable to demonstrate that they were purchased in that manner, then a proportional method of deduction is adopted. This is to apply to the taxed value of all such exempt securities a fraction the numerator of which is the net assets and the denominator the gross assets. The result of applying this fraction to the taxed value of exempt shares is said to give the proportion of those exempt shares attributable to capital, surplus, and undivided profits, and the quotient is accordingly deducted from the value of the net assets to obtain the measure of the tax on all the shares, and this, divided by the number of outstanding shares, gives the measure of the tax for each share. In the instant case, the trust company held amongst its assets shares of Pennsylvania corporations, exempt from tax, of the value of $135,787. It also held shares of the Philadelphia National Bank of the value of $20,202. These were found by the Department of Revenue to have been taxed at a total taxable value of $71,373. Applying the fractional formula mentioned, it was found that $8,886 of their taxable value should be attributed to capital, surplus, and undivided profits, and deducted from the [296 U.S. 113, 118] amount of the net assets. As the net assets had been ascertained to be $ 467,714, the deduction brought this figure down to $458,028, to which the rate of tax or 5 mills was applied.
It should be stated that under the act the corporation is required to make a report as the basis for the calculation of the tax, and, upon that report, the Department of Revenue settles the tax which is assessed against the corporation. The trust company, and not the stockholders, is liable in the first instance for the tax. Though given the right to pay the tax from its funds or to collect the amount from its stockholders, neither the company nor the commonwealth is given any lien upon the stock for the amount of the tax. As the obligation to pay the commonwealth is that of the company, its interest and its right to contest are beyond question.
In specifications of objection filed with its appeal from the tax settlement in the court of common pleas, the trust company insisted that all exempt shares (including the shares of the Philadelphia National Bank) should be deducted from the gross assets in full. This would exempt their full value rather than a proportion of their taxed value as ascertained by the use of the proportional method above described. The further objection was made that the method of settlement adopted resulted in discrimination against exempt securities issued by the United States or other federal instrumentalities, and that these should have been deducted at their full value from the gross assets before any computation of the tax. The common pleas court overruled these objections (without discussing the treatment of the national bank shares), saying, with respect to United States bonds and like exempt securities, that as the tax was a tax upon shares, and not upon the assets of the trust company, those securities had not in fact been taxed. In affirming the judgment, the Supreme Court of Pennsylvania said that as [296 U.S. 113, 119] the specifications of objections had not covered the point as to national bank shares, and the court below had not discussed that matter, it was not open in the appellate court. As respects United States bonds, and other federal securities, it concurred in the view of the lower court.
It is clear that the tax is not measured by each shareholder's aliquot proportion of all the assets of the company. If amongst those assets are found shares of stock of Pennsylvania corporations which, or whose shares, have been declared exempt by the state, this exemption is effected in the instant case by taking them wholly or partially out of the net assets which are the base for the tax. The appellant says this demonstrates that the tax is one upon assets. If the appellant is right, the exaction operates as a discrimination against government securities and other assets exempt under federal law. Missouri v. Gehner, 281 U.S. 313 , 50 S.Ct. 326. If the tax is one truly upon that independent property evidenced by the ownership of a share of corporate stock, its collection does not discriminate against United State securities. 11 [296 U.S. 113, 120] We think that the issue of discrimination is not to be resolved by a choice between the two contentions as to the nature of the tax. The point is that the state has chosen a portion only of the net assets of the corporation as a measure of the tax, whether the exaction be from the company or its shareholders. The state has exempted certain assets on the theory that to measure the tax in part by their value would in effect be to tax them twice. If to measure the shareholder's tax by inclusion of these taxed or exempted securities found amongst the company's assets would be to tax the shareholder in virtue of the company's ownership of those securities, if seems clear that to refuse to exempt United States securities from the measure of the tax is to lay a tax reckoned upon their value. To put it otherwise, if to exclude securities already taxed or exempted from tax pursuant to the policy of the commonwealth avoids double taxation, to include United States securities in the measure of the tax seems inevitably to increase the burden of the tax by reason of their ownership. If the burden of the tax be lifted in respect of some securities (as it is by confession from those issued by certain Pennsylvania corporations) it must necessarily fall on the remaining securities owned by the company. If the tax is lifted from the shares of certain trust companies because those companies own only stocks already taxed or relieved from taxation by the state, and shares in other trust companies are taxed amongst whose assets there are United States bonds or other securities entitled to exemption because issued by federal instrumentalities which are figured in the base of the tax, it is impossible to avoid the conclusion that the law discriminates in favor of the former and against the latter solely by reason of ownership of such federal securities.
We think that notwithstanding the Dauphin county court, in its opinion, failed to discuss this matter, as the Supreme Court of Pennsylvania points out, the question was sharply presented to that court and decided by it, and [296 U.S. 113, 123] that the rights of the appellant were specifically preserved and pressed at every stage of the proceeding. We find, therefore, that the question is here for decision. It might well be disposed of by reference to what has already been said with respect to bonds of the United States and like securities. The discrimination here disclosed is, however, more obvious than in the case of the other securities mentioned. The commonwealth of Pennsylvania elected to exempt certain shares of stock of its own corporations because they had already been taxed. It exempted them because to include them in the base would be in effect to tax them a second time. The shares of the Philadelphia National Bank had also been taxed pursuant to R.S. 5219, and if they were to be treated on an equal footing with shares of domestic corporations the state was bound to afford them a similar exemption from a second exaction.
Third. The appellant argues that if, as declared by the Supreme Court of Pennsylvania, the tax is one upon shares as such, it cannot be laid or collected by the commonwealth in respect of 166 shares of stock of the appellant which by confession are owned by individuals citizens and residents of states other than Pennsylvania, for the reason that such shares have no taxable situs in Pennsylvania. In view of the grounds of our decision, we find it unnecessary to pass upon this contention.
The judgment must be reversed, and the cause remanded for further proceedings not inconsistent with this opinion.
The argument for the appellant is that the tax might have been lawful if the shares had been valued without any deductions growing out of the nature of the capital, but that the moment a deduction was allowed in respect of any class, there was an unlawful discrimination against government securities unless the deduction was enlarged and made applicable to them. The attack is thus confined to amendments of the act which were placed upon the statute books in three years (1923, 1927, 1929), for there was no deduction of any kind under the act as first adopted in 1907. These amendments provide that the assessment shall be reduced by deducting therefrom (1) such part of the assets of the trust company as is invested in shares of other corporations taxed by the com- [296 U.S. 113, 125] monwealth of Pennsylvania upon capital or shares (1923, July 11, P.L. 1071, 1072, re-enacted by 1927, May 7, P.L. 853, 855, 1929, April 25, P.L. 673, 675 (72 PS Pa. 2001)), and (2) such part as is invested in the shares of other corporations relieved by the commonwealth from a capital tax or a tax on shares (1927, May 7, P.L. 853, 855, 1929, April 25, P.L. 673, 675 ( 72 PS Pa. 2001)). The purpose of the first deduction is to avoid double taxation or something akin thereto. Cf. Commonwealth v. Fall Brook Coal Co ., 156 Pa. 488, 495, 26 A. 1071; Commonwealth v. Lehigh Coal & Navigation Co., 162 Pa. 603, 609, 29 A. 664. The purpose of the second is to promote the policy of the commonwealth whereby particular kinds of business (i.e., the business of manufacturing corporations, laundering corporations, and corporations for the processing and curing of meats) are relieved from the payment of taxes imposed on other corporations to the extent that the business so favored is carried on in Pennsylvania. 16 Dupuy v. Johns, 261 Pa. 40, 46, 104 A. 565. [296 U.S. 113, 126] At the time of the assessment, the appellant was the owner of shares in corporations that paid a tax upon their capital to the commonwealth of Pennsylvania. Purdon's Pennsylvania Statutes, title 72, 1871. These shares will be described for convenience as investments in class No. 1. Except for certain shares in the Philadelphia National Bank, which will be separately considered, the assets did not include an interest in corporations that paid a tax upon their shares as distinguished from one upon their capital. The appellant was also the owner, or so it will be assumed, of shares of stock in manufacturing corporations that were relieved from any tax. These shares will be described for convenience as investments in class No. 2. The holding now is that the deduction of the shares of either of these classes is an act of discrimination forbidden by the national Constitution, unless investments in obligations issued by the national government are accorded the same favor.
I read the cases otherwise. The statute was not passed as an act of 'unfriendly discrimination' (Adams v. Nashville, 95 U.S. 19 , 22 Am.Rep. 430; Mercantile Nat. Bank v. New York, 121 U.S. 138, 161 , 7 S. Ct. 826; Aberdeen Bank v. Chehalis County, supra, 166 U.S. 440 , at page 461, 17 S.Ct. 629) against the national securities, nor was it passed in aid of classes of investments with which the national securities are in substantial competition. In the absence of one or other of these motives or results the prejudice, if [296 U.S. 113, 127] any, is too remote to be forbidden. There is no room in the solution of problems of this order for doctrinaire definitions, heedless of practical results. Metcalf & Eddy v. Mitchell, 269 U.S. 514, 523 , 524 S., 46 S.Ct. 172. 'In a broad sense, the taxing power of either government, even when exercised in a manner admittedly necessary and proper, unavoidably has some effect upon the other.' Metcalf & Eddy v. Mitchell, supra, 269 U.S. 514 , at page 523, 46 S.Ct. 172, 174. A sterile formalism whould quickly lead to an impasse, the activities of the states checked because of an indirect effect upon the agencies of the federal government, and the federal activities checked for fear of a like effect upon the agencies of the states. One must view the subject in a large way if government is to go on at all. Educational Films Corporation v. Ward, supra, 282 U.S. 379 , at page 390, 51 S.Ct. 170, 71 A.L.R. 1226, and cases there cited; Pacific Co. v. Johnson, 285 U.S. 480, 489 , 52 S.Ct. 424; Trinityfarm Co. v. Grosjean, 291 U.S. 466 , 54 S.Ct. 469; Willcuts v. Bunn, 282 U.S. 216, 225 , 226 S., 51 S. Ct. 125, 71 A.L.R. 1260; Helvering v. Powers, 293 U.S. 214, 225 , 55 S.Ct. 171.
'Unfriendly discrimination' might be inferred if securities of every kind were excluded from the reckoning with the single exception of the obligations of the national government. That would be an extreme case, the conclusion hardly doubtful. Even though hostility were not so pointed as in the case supposed, there might still be an invidious distinction if securities in substantial competition with evidences of indebtedness issued by the national government had been given a preferred position. Nothing of the kind appears. 'For reasons of public policy, and not as an unfriendly discrimination' (Aberdeen Bank v. Chehalis County, supra, 166 U.S. 440 , at page 461, 17 S.Ct. 629, 637), the value of a share in a trust company is to be ascertained by excluding from the assets the shares in other corporations that are liable to the state for a tax upon their capital. Let it be assumed, for illustration, that a trust company is the owner of shares of stock in a department shore doing business in Philadelphia. Under the statutes of Pennsylvania a bus- [296 U.S. 113, 128] iness of that kind pays a tax upon its capital. A trust company does not. If it did, a hardship akin to that of double taxation would result if its interest in the department store were made use of to magnify its burden. But the process of taxation does not end at that point. By the plan of the statute the assessor passes over the trust company and lays the tax upon the shareholders. The same considerations of fair dealing and equality are then applicable to them. So at least the Legislature of Pennsylvania might not unreasonably believe. Never before has it been held that out of deference or favor toward the securities of government a state is disabled from framing its system of taxation along lines of equity and justice. Hepburn v. School Directors, 23 Wall. 480, 485.
What is true of investments in class No. 1 is true also of investments in class No. 2. 'For reasons of public policy, and not as an unfriendly discrimination' (Aberdeen Bank v. Chehalis County, supra), corporations organized for laundering, for the processing and curing of meats, and for manufacturing within the state, have been relieved by Pennsylvania from liability for a tax upon their capital. The motive dictating that exemption is the desire to induce capital to come or stay within the state when employed in forms of enterprise believed to be important for the good of the community. Dupuy v. Johns, supra; Commonwealth v. Barnes Bros. Co., 5 Dauphin Co. Rep. (Pa.) 75, 77; cf. New York State v. Roberts, 171 U.S. 658, 665 , 666 S., 19 S.Ct. 58. In promotion of the same policy the shares of corporations thus relieved from liability for a tax are excluded from the reckoning when shareholders in trust companies are taxed upon the value of their holdings. The reckoning does not exclude the bonds or notes or other evidence of indebtedness of corporations of any kind, foreign or domestic. It does not exclude the shares of any corporation not engaged in the enumerated forms of business, except in so far as such other corporations have al- [296 U.S. 113, 129] ready paid a tax upon their capital or shares. It does not exclude the shares of manufacturing corporations, except to the extent of the capital employed in Pennsylvania. The deduction is limited in range and beneficent in aim.
The situation, then, is this: Vast classes of securities, bonds and notes of every kind, as well as shares of stock in many and varied enterprises, are in the same position for the purpose of the tax in suit as government bonds and notes. The few investments that occupy a different position are not comparable in kind or in attractiveness to the obligations of the government, and do not substantially compete with them. To hold that there was discrimination here in any forbidden sense is to hold that bonds and notes of the United States must be deducted from the value of the shares if there is a deduction of any form of investment, no matter how minute in amount or alien in quality. Assume, for illustration, an exemption of the shares of corporations engaged in the manufacture of books or in the sale of works of art, an exemption accorded in furtherance of a policy to foster art and letters. If the prevailing opinion stands, the policy in such a case must be abandoned or the federal bonds included. Assume again that laundering corporations only had been relieved by Pennsylvania from liability for a tax upon their capital. Laundering corporations, as we have seen, were actually relieved, but manufacturing corporations also. The prevailing opinion, if it stands, would bring us to a holding that laundering corporations could not be favored without hostility and peril to the Treasury at Washington. This is to lose sight of the essence of discriminatory statutes and to stick in the bark of a hard and narrow verbalism.
Two cases, National Life Insurance Co. v. United States, 277 U.S. 508 , 48 S.Ct. 591, and Missouri ex rel. Missouri Insurance Co. v. Gehner, 281 U.S. 313 , 50 S.Ct. 326, much relied upon by the appellant, are far beside the mark.
The first of these cases brought up a controversy as to a tax laid by Congress on the income of a life insurance company. The company was to be allowed (1) a deduc- [296 U.S. 113, 132] tion for tax exempt securities, and (2) an amount equal to 4 per cent. of its mean reserve fund, diminished, however, by the amount of the first allowance, the interest on government securities exempt under the federal law. The court held that the effect of the second allowance was to cancel the exemption conceded by the first.
The second of the two cases was one where in the view of a majority of the court a tax had been laid directly on the capital assets of the taxpayer and so on the government bonds included in the assets. It was not a case like this where the shares and not the capital were subjected to the burden.
I am unable for these reasons to discover an unlawful discrimination, though the tax be assessed in accordance with the statute.
Assuming such a discrimination, I do not understand that any mandate is laid by this court upon the Supreme Court of Pennsylvania as to the choice between two methods of avoiding or correcting it.
The Acts of 1923, 1927, and 1929, prescribing the deductions, were amendatory statutes, separable, even though invalid, from the acts thereby amended. Eberle v. Michigan, 232 U.S. 700, 705 , 34 S.Ct. 464; Davis v. Wallace, 257 U.S. 478, 484 , 485 S., 42 S.Ct. 164; Truax v. Corrigan, 257 U.S. 312, 342 , 42 S.Ct. 124, 27 A.L.R. 375.
If the state maintains the deductions prescribed by the amendments, it must remove the discrimination now held to be unlawful, even at the price of enlarging the deductions. Iowa-Des Moines Bank v. Bennett, 284 U.S. 239, 247 , 52 S.Ct. 133. On the other hand, it may cancel the deductions altogether, annulling the amendatory acts in so far as they prescribe a new method of valuation and going back in that respect to the law previously in force. In that event the tax to be paid by the appellant will be increased instead of lessend. The choice between these curative measures must be made by the state court. [296 U.S. 113, 133] For reasons stated in Bank of California v. Richardson, 248 U.S. 476 , 39 S.Ct. 165, the assessment is excessive to the extent that it includes shares of stock of the Philadelphia National Bank belonging to the trust company. These shares, having been taxed to the trust company as owner, could not properly be taxed again to a shareholder of the owner. Bank of California v. Richardson, supra; R.S. 5219.
Other questions are in the case, but they are not decided in the prevailing opinion, and will not be considered here.
The judgment should be modified by directing the deduction from the assessment of the value of the appellant's shares in the Philadelphia National Bank, and, as modified, affirmed.
[ Footnote 1 ] 38 Dauphin Co. Rep. 22.
[ Footnote 2 ] 315 Pa. 429, 173 A. 309.
[ Footnote 3 ] Com. v. Standard Oil Co., 101 Pa. 119, 145; Com. v. Fall Brook Coal Co., 156 Pa. 488, 26 A. 1071; Com. v. Pennsylvania R. Co., 297 Pa. 308, 314, 147 A. 242; Com. v. Eastern Securities Co., 309 Pa. 44, 163 A. 157, 86 A.L.R. 892.
[ Footnote 4 ] 'Section 1. That from and after the passage of this act, every company ... shall ... make to the Auditor General a report in writing ... setting forth the full number of shares of the capital stock subscribed for or issued by such company, and the actual value thereof, which shall be ascertained as hereinafter provided; and thereupon it shall be the duty of the Auditor General to assess such shares for taxation at the rate of five mills upon each dollar of the actual value thereof, the actual value of each share of stock to be ascertained and fixed by adding together the amount of capital stock paid in, the surplus and undivided profits, and dividing this amount by the number of shares.' Act Pa. June 13, 1907, P.L. 640.
[ Footnote 5 ] Com. v. Union Trust Co., 237 Pa. 353, 355, 356, 85 A. 461.
[ Footnote 6 ] Act of July 11, 1923, P.L. 1071-1072; Act of May 7, 1927, P.L. 853, 855.
[ Footnote 7 ] P.L. 673 (72 PS Pa. 1991, 2001, 2002, 2011). The Act of April 9, 1929, P.L. 343, 807 and 1705, 72 PS Pa. 807, 1705 (the so-called Fiscal Code) did not alter the substance of the law, but merely affected the executive agencies which were to administer it.
[ Footnote 8 ] Van Allen v. Assessors, 3 Wall. 573; Cleveland Trust Co. v. Lander, 184 U.S. 111 , 22 S.Ct. 394; Des Moines National Bank v. Fairweather, 263 U.S. 103 , 44 S.Ct. 23.
[ Footnote 9 ] Com. v. Hazelwood Savings & Trust Co., 271 Pa. 375, 114 A. 368.
[ Footnote 10 ] Senior v. Braden, 295 U.S. 422, 429 , 55 S.Ct. 800.
[ Footnote 12 ] Act of July 15, 1897, P.L. 292, as amended by Act of April 25, 1929, P.L. 677 (72 PS Pa. 1931, 1932, 1951, 1961).
[ Footnote 13 ] Com. v. Provident Trust Co., 40 Dauphin Co. Rep. (Pa.) 146, 177.
[ Footnote 14 ] (Pa. Sup.) 180 A. 16.
[ Footnote 15 ] Carter v. Texas, 177 U.S. 442, 447 , 20 S.Ct. 687; Ward v. Board of Com'rs of Love County, 253 U.S. 17, 22 , 40 S.Ct. 419.
[ Footnote 16 ] The following is the text of the statute which defines the corporations entitled to such relief: 'And provided further, That the provisions of this section shall not apply to the taxation of the capital stock of corporations, limited partnerships, and joint-stock associations, organized for laundering, for the processing and curing of meats, their products and by-products, or for manufacturing purposes, which is invested in and actually and exclusively employed in, carrying on laundering, the processing and curing of measts, their products and by-products, or manufacturing within the State, excepting companies engaged in the brewing or distilling of spirits or malt liquors, and such as enjoy and exercise the right of eminent domain; but every corporation, limited partnership, or joint-stock association organized for the purpose of laundering, or processing and curing meats, their products and by-products, or manufacturing, shall pay the State tax of five mills herein provided, upon such proportion of its capital stock, if any, as may be invested in any property or business not strictly incident or appurtenant to the laundering or manufacturing business, or the business of processing and curing meats, their products and by-products, in addition to the local taxes assessed upon its property in the district where located; it being the object of this proviso to relieve from State taxation only so much of the capital stock as is invested purely in the laundering or manufacturing plant and business, or the plant and business used in the processing and curing of meats, their products and by-products: Provided further, In case of fire and marine insurance companies, the tax imposed by this section shall be at the rate of three mills upon each dollar of the actual value of the whole capital stock: Provided, That nothing in this ac shall be so construed as to apply to building and loan associations chartered by the State of Pennsylvania.' Purdon's Penn. Statutes, title 72, 1892.
[ Footnote 17 ] For other and less direct analogies, see Cumberland Coal Co. v. Board of Revision, 284 U.S. 23, 28 , 52 S.Ct. 48; Iowa-Des Moines Bank v. Bennett, 284 U.S. 239, 245 , 52 S.Ct. 133; Rowley v. Chicago & N.W.R. Co., 293 U.S. 102, 111 , 55 S.Ct. 55.

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