Case Name: Porto Rican & American Insurance Co., Plaintiff and Appellant, v. Juan G. Gallardo, Treasurer of Porto Rico, Defendant and Appellee
Court: Supreme Court of Puerto Rico
Jurisdiction: Puerto Rico
Decision Date: 1926-07-29
Citations: 35 P.R. 842
Docket Number: No. 3789
Parties: Porto Rican & American Insurance Co., Plaintiff and Appellant, v. Juan G. Gallardo, Treasurer of Porto Rico, Defendant and Appellee.
Judges: Chief Justice Del Toro and Justice Franco Soto dissented.
Reporter: Puerto Rico Reports
Volume: 35
Pages: 842–869

Head Matter:
Porto Rican & American Insurance Co., Plaintiff and Appellant, v. Juan G. Gallardo, Treasurer of Porto Rico, Defendant and Appellee.
No. 3789.
Argued February 2, 1926.
Decided July 29, 1926.
J. J Ortiz Alibrám for the appellant. Hon. George G. Butte, Attorney General, •Garlos Llauger Díaz and J. A. López Acosta for the appellee. H. Franeeschi' filed a brief as amicus curiae for Armstrong, Keith & Kern.

Opinion:
Me. Justice Wole
delivered the opinion of the court.
The complainant Porto Rican & American Insurance Company is a domestic corporation organized under the laws of Porto Rico and subject to the payment of taxes imposed by the laws in force. The said corporation for the years 1922-23 presented a return to the Treasurer of Porto Rico wherein were included primarily the amount of its shares and undivided profits, taking as the value of said shares what appears on their face, or $100, the said property amounting to $66,190; furthermore a description of the property of the said corporation possessed, detailed as follows :
Cash on hand- $ 6, 448. 66
Liberty Bonds_ 90, 537. 26
Shares in Corporations_ 11, 850. 00
Mortgage Credits_ 16, 000. 00
Notés and other personal credits_ 14, 409. 65
Total_•_$139,245.57
The Treasurer of Porto Rico took as a basis for taxation the capital stock at its face value, $60,000, and undivided profits $6,190, in all $66,190, and required the complainant to pay the sum of $1,323.80. After the Board of Review and Equalization on appeal affirmed the Treasurer's decision the complainant paid the amount under protest and brought this suit which the district court dismissed.
The complainant in the district court maintained that the Treasurer had no right to impose any tax except on the cash on hand, namely, $6,448.66, as the liberty bonds, shares of stock, mortgage credits and notes were exempt from taxation, either by virtue of the laws of the United States or the laws of Porto Rico, and in the latter instance section 291 of the Political Code.
In our consideration of this case we have been confronted with various propositions. First, and this in the main is the position of the Treasurer of Porto Rico, that the tax here sought to be imposed by virtue ,of section 317 of the Political Code falls by its terms on the stockholders and not on the corporation itself; second, and this was the position of the court below, that the tax is an excise and hence, according to the court, following to a large extent France & New York Medicine Co. v. Reily et al., 31 P.R.R. 617. falls on the stockholders rather than on the corporation, and third, that the taxation sought to be imposed is in reality on the corporate franchise granted by The People of Porto Rico. The theory involved in any and all of these propositions is that exempt personal property may not be deducted by the corporation.
Section 317 of the Political Code, as amended in 1904, reads:
"The personal property of institutions, corporations and companies incorporated under the laws of Porto Rico other than banking institutions having a share capital shall be assessed to sit eh institutions, corporations and companies by the Treasurer of Porto Rico in the manner provided by this section. The actual present value of; the capital of such corporations shall be ascertained by the Treas urer of Porto Eieo from the sworn declarations of the presidents, directors or other chief officers of such corporations as required by section 319, and from such other reliable information as the Treasurer may haye or secure, and the present actual value shall in no ease be less than the value of the capital stock and bonds plus the surplus and undivided earnings of said institutions, corporations and companies, nor less than the market value of the real and personal property of said institutions, corporations and companies, including in personal property rights, franchises and concessions. From the valuation thus obtained shall be deducted the total valuation of real property of said corporations, as ascertained in accordance with the provisions of section 316, and the remainder shall be deemed to represent the personal property of said corporations for purposes of taxation. ' '
The plain reading of this section would tend to convince us that the Legislature was imposing a tax on the property of the corporation and on the personal' property of the corporation. The Treasurer in reality has no choice. From the return made by the corporation or other information he may obtain he must, after deducting the value of the real estate, assess the capital stock, bonds and undivided profits of the corporation at their value, and if this value is less than the market value of all the property of the corporation, then the said market value shall be the basis of the taxation. If some confusion arises in the mind by reason of some of the language used in the midst of the section, the purpose of the Legislature is made clear by the concluding words: "And the remainder shall be deemed to represent the personal property . " If, by reason of the equivalency sought to be established by said final words the intention is at all doubtful, it is made clear in the preamble contained in the section itself. The "personal property" is to be assessed to the corporation in the manner provided by the section. The Treasurer must only adopt the mode which will give the highest valuation for the said personal property. He is not empowered to pursue a method or establish a basis which would give the best results to The People of Porto Eico otherwise than by choosing tlie mode which will give the highest valuation of the property of the corporation whose assessment the Treasurer is considering. He is not, under section 317, empowered to place a tax on the stockholders, but only on the personal property of institutions, corporations and companies incorporated under the laws of Porto Bieo.
While when a corporate franchise is to be taxed and the Legislature has so determined, the taxation of the franchise might be determined more or less in the mode set forth in section 317, Schwab v. Richardson, 263 U. S. 88; Tremont & Suffolk Mills v. Lowell, 178 Mass. 471; Hannan v. First National Bank, 269 Fed. 531, yet the use of the words "value" and "valuation" are significant and they generally import a tax on property and not a franchise or an excise tax. Powers v. Detroit & Grand Haven Railway, 201 U. S. 561, where the court said that a valuation rather than a mathematical apportionment was intended; Bank of Commerce v. New York, 2 Black, 620; Pingree v. Dix, 44 L. R. A. 688; Cooley on Taxation, vol. 2, par. 850, 4th Ed. Generally these words "value" and "valuation" refer to a tangible price and the tangible price of property. In the Hannan Case, supra, where a valuation was permitted the Legislature had made it absolutely clear that the tax was to fall on the shareholders.
The division of taxes in the Political Code tends strongly io show that it was the intention of the Legislature to tax tangible property or its representative in intangible property, as particularly set forth in section 317, and also that there was no intention to make the valuation a measuring rod for something other than a tax on the capital of the corporation as constituted by its property. Title IX of the Political Code is devoted to revenues. Chapter 1 thereof by its title relates to the assessment of property. Section 285, as originally passed, taxed a certain rate on real and personal property not belonging to corporations and a different and a higher rate on all the real and personal prop erty of all corporations. Comment is made in the textbooks on the tendency to impose higher taxation of corporations, but such excess is justified always by the peculiar privileges, protection and limited liability afforded' such artificial persons created by the State. With only a difference in the rate of taxation the idea was to tax all persons in Porto Rico in the same manner. Section 285 was repealed implicitly by substitution in 1908. The rate of taxation was made equal for all persons by the substitute Act of March 12, 1908, p. 187. The tax was to be on all real and personal property in Porto Rico. The division of taxation into "real" and "personal" as originally designed by the Legislature remained unchanged.' Section 317 in this regard was harmonious with section 285 before 1908, and in that year no intention was displayed to vary the harmony theretofore existing. Nothing was done to show that the taxation fixed by section 317 should relate to franchise or excises or that its words should be interpreted in a different sense than was originally indicated by section 285.
Section 290 of the Political Code is as follows:
"That all property not expressly exempted from taxation shall he assessed, and taxed. For the purposes of the assessment and collection of taxes, real property shall he deemed to he synonymous with immovables as defined in sections 333, 334 and 335 of the Civil Code; Provided, however, That machinery, vessels, instruments or implements not fixed to the building or soil shall not he deemed to he real property. Personal property shall include such machinery, vessels, instruments or implements not fixed to the building or soil, livestock, money, whether in the possession of the owner thereof or held by or on deposit with some other person or institution, bonds, stocks, certificates in unincorporated syndicates or partnerships, patent-rights, trade-marks, franchises, concessions and all other matters and things capable of private ownership and not included within the meaning of the term 'Real property,' but shall not include book-credits, promissory notes nor other personal credits."
This is taxation on property and does not contemplate franchises or make provision for excises. There is a separate subdivision of the Political Code to cover excises.
Various sections of the Political Code prior to section 31.7, all contained under Title IX of the said Code, show that taxation on tangible property in Porto Pico was held in mind. Under section 308, for example, the permanent Board of Review and Equalization was created and sits to revise assessment on "real and personal" property as provided by this title, namely, Title IX. The Board is to he composed in part of persons versed in the value of property of Porto Rico.
Section 316 provides for the taxation of real property of domestic corporations. Section 317, the one under discussion, following the general scheme, determines the taxation of personal property of the same domestic corporations. In. section 320 foreign corporations are taxed. Says the Legislature in said section:
" Provided, hoivever, That in the determination of the actual present value of the capital of such corporations only such part of the capital of such corporations shall be considered and assessed as is employed in the transaction of business in Porto Rico, but the amount of such capital shall in no case be less than the value of tire real and personal property of such corporation or company situated in Porto Rico, including in such personal property all franchises or concessions granted said corporation or company under the laws of Porto Rico."
The same purpose exists to reach or estimate the personal property of corporations, strangers to ns except in having property here or doing business in the Island. Section 317 uses the words "capital stock" where section 320 says "capital,-" differences to which we shall allude hereafter. Section 318, referring to local corporations, is as follows:
"If the total valuation of the capital of any such institution, corporation or company, as reported by the president, director or other chief officer thereof, shall be increased by 'the Treasurer, the Treasurer shall notify said president, director or other chief officer thereof and said institution, corporation or company shall have a right of appeal from such valuation to the board of review and equalization: Provided, Said institution, corporation or company shall file a notice of protest with said board within fifteen days of the sending' of said notification."
We think that this section likewise has in mind a property tax. It is a more or less tangible property that is being considered. The whole scheme of Title IX, when not otherwise clearly expressed, is a tax on real and personal property belonging to all individuals, corporations or otherwise.
Independently of the wording of section 317 the Treasurer bases his principal reliance on section 322 of the Political Code, which is a section also contained under Title IX of said Code. This section provides:
"Insular, municipal and local taxes upon capital, shares and property of the institutions, corporations, and companies included within the meaning' of this Title and upon shares in banks engaged in business in Porto Rico, shall be payable at the office of the Treasurer, who shall pay, pursuant to law, the proportion of such municr pal and local taxes due, to the proper officers of the respective municipal districts or local divisions; and said institutions, corporations and companies are hereby authorized to retain the proportionate taxes upon capital shares from the earnings or dividends accruing to the owners thereof, or to cancel a proportion of said shares sufficient to pay said taxes. Insular, municipal and local taxes upon such institutions, corporations and companies shall be due in semiannual installments, and all penalties for delinquency and the liability to attachment, seizure and sale of property hereinafter provided shall apply to such institutions, corporations and companies in the same manner as to private individuals."
We can, not see that such section is anything more than a general provision by which the taxation upon share stock actually already assessed to shareholders and ultimately to come out of their individual holdings by the law shall be paid and collected by the corporation. Section 322 in no way determines what the taxation of corporations shall be. With regard to domestic corporations the taxation and the form thereof is specifically determined by section 317. Therefore, unless section 317 in itself and by its own force imposes a tax on shareholders, section 322 can furnish no aid to the Treasurer. We draw attention also to the fact that it is in section 322 that the word "share" is used, while in section 317 no such word appears. We shall discuss some of the distinctions between the words "capital stocik" and "share capital."
The appellant says, and we think correctly,- that taxation on shares has only been imposed upon the banks and banking institutions in Porto Eico.
We revert to a consideration of section 317. Whether an assessment of shares of stock is to be deemed one against shareholders individually or one against the corporation is to be determined mainly by the facts of the particular case. Cooley on Taxation, par. 981, p. 1971, 4th Ed.; Home Ins. Co. v. New York, 134 U. S. 594; Van Allen v. The Assessors, 3 Wall. 573; Powers v. Detroit & Grand Haven Railway Co., 201 U. S. 543; Delaware, etc., R. R. Co. v. Penn., 198 U. S. 341; Des Moines Nat. Bank v. Fairweather, 263 U. S. 103; Adams Express Co. v. Kentucky, 166 U. S. 171; C. O. & G. R. Co. v. Harrison, 235 U. S. 292; Iowa Loan & Trust Co. v. Fairweather, 252 Fed. 608; In re Oklahoma National Life Ins. Co., 173 Pac. 376; In re Assessment of Amazon Fire Ins. Co., 173 Pac. 655; Union Trust Co. v. Coleman, 126 N. Y. 443, 440, 27 N. E. 818, 12 L. R. A. 762, and other cases on page 23 of the brief for appellant.
That "capital" and "capital stock" are used interchangeably and are not to be considered as share stock or a tax on the shareholders appears from the following citations: Home Savings Bank v. Des Moines, 205 U. S. 503; Powers v. Detroit & Grand Haven Railway Co., 201 U. S. 560; First National Bank v. Adams, 258 U. S. 365; Owensboro National Bank v. Owensboro, 173 U. S. 664;. Bank of Commerce v. New York, 2 Black, 620; Delaware, etc., R. R. Co. v. Penn., 198 U. S. 354; People ex rel. Lackawanna Trans. Co. v. Knight, 75 App. Div. New York, 164, and cases; 9 C. J., 1278, note 36 (a). Likewise some of the cases cited in the preceding paragraph.
The foregoing cases also settle the point that the words "capital" or "capital stock" used absolutely in a statute, and no contrary intent appearing, are to he interpreted as falling on the capital of the company and not on the shareholders.
Delaware, etc., R. R. Co. v. Penn., supra, is particularly applicable. Said the court: "The Supreme Court of Pennsylvania has held that a tax on the value of the capital stock is a tax on the property and assets of the corporation issuing such stock (citing cases). This court has also held that a tax on the value of the capital stock of a corporation is a tax on the property in which that capital is invested, and in consequence no tax can thus be levied which includes property that is otherwise exempt," citing cases.
The appellant, as we have indicated before, points out that when the Legislature has desired to put a tax on the shareholders it has plainly done so as in the case of banks and banking institutions. The appellant draws attention to the fact that section 317 and other sections of the Political Code as originally drawn did not exclude banking institution's from the operation of' the general' laws against domestic corporations, but that in 1904 the Legislature clearly showed its intention that such banks and banking institutions should be separately and differently taxed, namely, by putting a tax on the shareholders.
The decisions also tend to show that a tax on the value of the capital stock is generally a tax on the property and is not to be interpreted as a franchise or ah excise.
The only words in section 317 that could possibly show an intention to tax the share stock of the shareholders are the words "capital stock." But previously in the same section the Legislature had said "The actual present value of the capital of such corporations shall be ascertained," etc. The words "capital" and "capital stock" are used interchangeably in the section itself. In section 318 heretofore cited the Legislature again speaks of the total valuation of the "capital."
The word "capital" has frequently been defined, but always to designate the property of a corporation. Note to Foster v. Stevens, 13 L.R.A. 166; 9 Corpus Juris, 1278.
In Home Savings Bank v. Des Moines, supra, the banks were corporations created by the State of Iowa. The court said that it must inquire whether the law really imposed a tax upon the shares of the stock as the property of their owners or merely adopted the value of those shares as a measure of the valuation of the property of the corporaijon, and by that standard taxes that property itself; that there might be a tax upon the shares of a corporation which are property distinct from that owned by the corporation and with a different owner, without an allowance of the exemption due to the property of the corporation itself, while, if the tax is upon the corporation's property, all exemptions due it must be allowed; that the law imposed no obligation on the shareholder, and that the taxes, therefore, were not to be paid by the corporations as agents of their stockholders, but as their own debt, and that unless it be supposed that the law required them to pay taxes upon 'property which they do not own, the taxes must be regarded as taxes upon the property of the corporation. The court said:
"Tn the valuation for taxation the assessor is required to 'take .into account the capital, surplus and undivided earnings,' must be furnished with 'a verified statement of all matters provided by the preceding section,'-which by reference is seen to be a detailed statement showing the assets of the bank."
And the court also said after reviewing cases:
"The case at bar cannot be distinguished in principle from these cases. In the first ease the tax was on the capital stock at its actual value; in the second case on the amount of the capital stock and the surplus earnings, ancl in the case at bar on the shares of the stock, taking into account the capital, surplus and undivided earnings. It would be difficult for the most ingenious mind and the most accomplished pen to state any distinction between these three laws, except in the manner by which they all sought the same end — the taxation of the property of the bank. The slight concealment afforded by the omission of the property eo nomine is not sufficient to disguise the fact that in effect it is the property which is taxed. If included in that property it is discovered that there is some which is entitled by Federal right to an immunity, it is the duty of this court to see that the immunity is respected."
The Supreme Court recognized the principle that when the tax is made to fall on the shareholders rather than on the corporation exempt property need not be considered. In the case in which this point was originally decided three judges dissented on the ground that the taxation on the shareholders really fell on the corporation. In other words, the dissenting judges thought that property of the corporation was really ultimately taxed. Again the court said:
"But the distinction .between a tax upon shareholders and one on the corporate property, although established over dissent, has come to be inextricably mingled with all taxing systems and cannot be disregarded without bringing them into confusion, which would be little short of chaos."
Therefore, it seems evident to us that the Supreme Court of the United States has decided directly that when the Legislature intends a tax to fall upon the shareholders rather than on the corporation, specific and express words must be used to carry such an intention into effect. It is true that in the same case of Home Savings Bank, supra, the Supreme Court said that the substance and effect of a statute must be considered, yet, considering the words here used, we can not see that section 317 can have a different interpretation than was given to the statutes before the Supreme Court of the United States when Iowa sought to tax its baniks.
When a state desires to put a tax both upon the corporation and its shareholders the intention must be clearly dis played; otherwise the courts will interpret the statute to mean one of two things, either a tax on the corporation or a tax on the shareholders. Statutes will not be construed to authorize taxation of both property of corporations and shares of stockholders unless intent to that end is clear. Tennessee v. Whitworth, 117 U. S. 129, 134; New Orleans v. Houston, 119 U. S. 265, 277; Loring v. Beverly, 222 Mass. 331; Board, etc., v. Ryan, 232 Pac. 834, and cases, 26 L.R.A. 158. In the first-named case national banks were being discussed and the court held that the capital stock (our italics) involved in United States securities was exempt, but shares of stock in the hands of individual stockholders might be taxed. Pour elements of taxation were recognized, namely: First, franchises; second, capital stock in the hands of the corporation; third, corporate property, and fourth, shares of the capital stock in the hands of the shareholders. Bach of these was under some circumstances an appropriate subject of taxation, and a state might under conceivable circumstances double up taxation, but the intention to impose double taxation must be clear. A fortiori, every presumption is against an intention of the Legislature to give the Treasurer a right to choose the mode of taxation. In Loring v. Beverly, supra, the court said that shares of stock were property distinct from the capital, franchises or other property of the corporation. "Taxation," pursued the opinion, "upon one or all of these elements of property of the corporation does not prevent taxation upon the shares of stock as property of the owner at his domicile. While possibly both kinds of property might be taxed in the same jurisdiction, such an intent on the part of the Legislature never would be presumed in the absence of unequivocal words to that end."
The tax can not be a tax on the corporation or on the shareholders at the option of the Treasurer. To assert that the Treasurer at his election may choose to impose a tax either upon the shareholders or upon the corporation would be to delegate legislative powers to the Treasurer. In Peo ple v. Neagle, 21 P.R.R. 339, we reviewed the authorities to show that certain administrative faculties might he delegated to the Treasurer. We laid emphasis upon the fact that the Treasurer in certain cases might fill in details, hut the Legislature has no right to delegate to the Treasurer the right to say on whom taxation shall fall. This is clearly a legislative faculty. That legislative powers can not he delegated is the uniform jurisprudence of the courts. People v. Neagle, supra, with cases, and specially Field v. Clark, 143 U. S. 649; Knickerbocker Ice Co. v. Stewart, 253 U. S. 149, 164; State v. Elam, 39 L.R.A. (N. S.), 686; James v. U. S. Fidelity, etc., Co., 133 Ky. 299, 117 S. W. 406; 37 Cyc. 724 et seq.; 26 R.C.L. 30. Therefore, a construction of the statute should he accepted that did not leave it optional with the Treasurer to choose a mode of estimate or valuation which in one case would allow property to he exempted and in another would not.
More or less in the same connection, as pointed out hy the plaintiff, section 2 of the Organic Act, unnumbered paragraph 22, provides that the rule of taxation in Porto Rico shall he uniform. It is evident that if the Treasurer may in one case fix a tax on the shareholders and in another a tax on the corporation itself, the rule of taxation in Porto Rico would not be uniform. Yet, apparently it is the contention of the Treasurer that under section 317 he has the right to impose either a property tax or a tax on the shareholders.
The tax can not be sustained as a tax on a corporate franchise. No such intention appears anywhere in the Political Code. In all the eases that we have seen the intention to tax the franchise was clearly displayed, either hy the constitution or the statutory laws of a particular state. Hurriedly reading some of the Massachusetts decisions, for example, it would seem that a taxation on a franchise is measured somewhat in the manner set forth in section 317 of the Political Code, hut in Massachusetts, we apprehend, either the statutes directly determine a tax on the franchise or else the constitution of that state made it necessary for such an interpretation to he put upon the legislative action. Manufacturers' Ins. Co. v. Loud, 96 A. D. 715, 99 Mass. 146; A. J. Tower Co. v. Comm., 223 Mass. 373; Loring v. Beverly, 222 Mass. 331; Murray v. Berkshire Life Ins. Co., 104 Mass. 586; Nat'l Bank of Commerce v. New Bedford, 155 Mass. 316; Tremont & Suffolk Mills v. Lowell, 178 Mass. 471, and eases cited. So far as we can discover neither Massachusetts nor any other state has statutes like our own, wherein the intention to tax "personal property" was so plainly manifested.
In addition to the fact that it appears to us that there is no intention to tax the franchise, the Treasurer and his advisers have also understood it in this wise and a contemporary construction by administrative authorities is to be given some weight.
When taxation is to be considered as a franchise and not a property tax, was discussed by the United States Supreme Court in a series of cases. Society for Savings v. Coite, 6 Wall. 594; Provident Institution v. Massachusetts, 6 Wall. 611; Hamilton Co. v. Massachusetts, 6 Wall. 632; but there was involved no valuation of property, nor was a statute like our own being considered. In Pollock v. Farmers' Loan & Trust Co., 157 U. S. 576, the distinction was shown to rest, not on any necessary reference to property, but rather on the privilege of doing business; in Porto Eico more particularly covered by the so-called patente law. Flint v. Stone Tracy Co., 220 U. S. 164; Kansas City Ry. v. Kansas, 240 U. S. 232; Baltic Mining Co. v. Massachusetts, 231 U. S. 83, all show how differently a legislature proceeds when it wishes to impose a franchise tax.
The Treasurer places some reliance on France & New York Medicine Co. v. Reily et al., 31 P.R.R. 617, supra. The facts there were totally distinct, and perhaps the case may be distinguished. However, whether such distinction may or may not be made, we feel bound to follow the reasoning and jurisprudence cited.
The appellant places some reliance on Gromer v. Central Life Ins. Co., 19 P.R.R. 856, and Fajardo Sugar Co. v. Richardson; 22 P.R.R. 290. Something there was favoring appellant in these decisions, but the taxation was on foreign corporations and a property method was being pursued. Section 317 was not involved.
We arrive at the conclusion that whether the tax is imposed on the capital, on capital stock or the physical property, the resulting taxation is on the property of the corporation.
In arriving at our decision we have also had the benefit, in a similar case, of the reasoning and' conclusion of Mr. Justice Wells of the United States District Court for Porto Rico in the ease of Fajardo Sugar Co. v. Juan G. Gallardo, Treasurer, Eq. No. 1295.
As this was a tax directed against the capital of the cor- ' poration the property exempt by law should not be included. We agree with appellant that it is entitled to a return of $1,227.93, as in this case only the cash on hand could be taxed.
The judgment should be reversed.
Chief Justice Del Toro and Justice Franco Soto dissented.