Court Opinion

ID: 9807916
Source: CourtListenerOpinion
Date Created: 2023-08-31 20:20:37.576929+00
Date Added: 2024-06-11T12:04:58.786829
License: Public Domain

Clark, C. J.,
dissenting: It is difficult to understand upon what principle of constitutional law it can be legally provided that if the'Reynolds Tobacco Company, a New Jersey corporation, but doing business here, had 66 2-3 of the total value of its property located in this State, the estate of the decedent, domiciled in Rhode Island and who has never even been in this State, must pay an inheritance tax of $2,658.85 on the stock which he owned in said company; but if the said Reynolds Tobacco Company had paid taxes on 66 1-3 only of its property located in this State, the decedent’s estate would have been liable to not one cent of inheritance tax. •
The Constitution of this State, Art. V, sec. 3, which guarantees equality and uniformity of taxation as a protection to the weaker and less influential part of our people from oppression by over-taxation caused by the exemption of other property from taxation, provides as follows: "Taxes shall be by uniform rule and ad valorem: Laws shall *280be passed taxing, by uniform rule, all moneys, credits, investments in bonds, stoclcs, joint-stock companies or otherwise; and, also, all real and personal properly according lo its true value in money.”
In Person v. Watts, 184 N. C., 499, the majority of this Court held, at bottom of page 508, that while the Legislature could require the individual stockholder residing here, and therefore receiving the benefit of the protection of our laws, to pay on his shares of stock, the Court could not enforce this provision of the Constitution of equal and uniform taxation, and in the later case of Person v. Doughton, 186 N. C., 723, by a divided Court, it was held that the Court could not enforce the taxation of shares of stock in corporations outside the State though held by stockholders in this State.
It is therefore inexplicable how the State has jurisdiction to tax the property of the estate of this decedent who resided in Rhode Island and had no property here, Or tax its devolution by the laws of the domicile of the owner over which this State can have no control.
By the decision in Person v. Watts, supra, there was held exempted from the uniform taxation which is clearly required by the Constitution, on a fair estimate, at least 1,500 million dollars of domestic stocks owned in this State, and by the decision in Person v. Doughton, 186 N. C., 723, the Court again disclaimed the right to require the taxation of over 200 million dollars on a fair estimate of foreign stocks owned by residents and taxpayers in this State. The uniform and ad valorem taxation required by the Constitution upon these immense amounts invested by shareholders in the stocks of railroads, water-power companies, banks and other corporations would have vastly reduced the rate of taxation upon all other property in the State and would have complied with the requirement of the constitutional provision subjecting "all investments in stocks” to the same uniform rate of taxation required of all investments in lands, livestock and other property which the decision in Person v. Watts (bottom of page 508) expressly states that the Legislature could have required, to be taxed.
It has always been contended since Madison v. Marbury that when the statute does not conform to the constitutional requirements the courts will hold it invalid to that extent. In the present case the decedent, whose estate is taxed $2,658.85, has never been in this State, and it is more than difficult to see how the State acquires jurisdiction over his property when it cannot enforce the constitutional requirement of equal and uniform taxation as to investments in stocks owned by residents of this State to the extent of nearly 2,000 million dollars “invested in stocks,” domestic and foreign.
The decedent owned no property here. The stock, the title to which was in the decedent, followed his person according to the well-settled *281principles of law. In Pullen v. Corporation Commission, 152 N. C., 553, Manning, J., said: “It is likewise well settled by tbe language of our State. Constitution, by many decisions of tbis Court and of tbe Supreme Court of tbe United States, and is now generally accepted law that, tbe property of a shareholder of a corporation in its shares of stock is a separate and distinct species of property from tbe property, whether real, personal, or mixed, held and owned by tbe corporation itself as a legal entity. It would be useless to cite authority to support a proposition so well established and generally accepted.”- Therefore it follows that the decedent as a shareholder in the Reynolds Company had no property here, and we can neither tax it nor its devolution.
Brown, J., in the same case, concurring, says, at page 562: “I agree, also, that it is well settled that the shares of stock iri any corporation, when owned by individuals, are separate and distinct property from the assets of the corporation and may be taxed as such.”
In the same case, Hoke, J., at page 582, quoting from Bank v. Tenn., 161 Tenn., 146: “The capital stock of a corporation and the shares into which such stock may be divided and held by individual shareholders, are two distinct pieces of property. The capital stock and the shares of stock in the hands of the shareholders may both be taxed, and it is not double taxation. Van Allen v. Assessors, 70 U. S. (3 Wall.), 244, cited in Farrington v. Tenn., 95 U. S., 678. This statement has been reiterated many times in various decisions by this Court, and is not now disputed by any one.”
A later case, Brown v. Jackson, 179 N. C., 363, 371 (1920), cites and approves the above cases. In our own Court there are many other cases to the same effect. Comrs. v. Tobacco Co., 116 N. C., 446; Chief Justice Smith in Belo v. Comrs., 82 N. C., 415 (33 Am. Reports, 668), and Ashe, J., in Worth v. R. R., 89 N. C., 291. There are other cases exactly in point and should be followed.
The law as above stated is also clearly summed up to the same 'effect in 37 Cyc., 758, 759, that “the capital stock of a corporation and the shares in which it is divided are separate and distinct interests and each of a taxable character,” citing numerous cases from Alabama, Georgia, Illinois, Indiana, Iowa, Kentucky, North Carolina, Ohio, Tennessee, Virginia, Washington, and the U. S. Supreme Court (see notes on pages 758, 759), and on page 759 it is further said: “Shares of stock in a foreign corporation held by resident owners may be taxed to them without regard to the taxation of the capital or property of the corporation at the place of its domicile”; citing cases from California, Georgia, Iowa, Kentucky, Maryland, Massachusetts, Minnesota, Ohio, and Rhode Island.
*282Iii the same volume (37 Cyc.), 821, it is said: “Since the capital of a corporation, which is its property, is a distinct and separate thing from the interest of stockholders, represented by the shares they severally hold, and since the principle which forbids double taxation is not violated, at least according to decisions in many States, by assessing the capital to the corporations and the shares to their holders, it follows that shares of stock in a domestic or foreign corporation may properly be assessed for taxation to their holder at the place of his domicile, irrespective of taxation which may be imposed on the corporation itself in respect to its capital or franchise,” citing cases from California, Connecticut, Illinois, Iowa, Kentucky, Louisiana, Maryland, Missouri, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, Washington, and the U. S. Supreme Court.
To the same purport, 14 Corpus Juris., 387, 388, secs. 509 and 510, says: “Although shares of stock are intangible and rest in abstract legal contemplation, they nevertheless are property — a species of incorporeal property, consisting in rights in the proceeds, management and assets of the company, so that they may be the subject of conversion and have the other incidents of property”; citing cases from the U. S. Supreme Court, Alabama, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah, Virginia, and West Virginia, and says further (section 510) : “Contrary to the early opinion in the case of corporations owning real estate, it is now very generally agreed that shares of stock in corporations are personal property, whether they are declared to be such by statute as is sometimes the ease, or not, and whether the property of the corporation itself is real, as in the ease of mining companies, land companies, railroad companies, canal companies and the like, or only personal,” citing decisions from the U. S. Supreme Court, Alabama, California, Colorado, Connecticut, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Massachusetts, Missouri, Montana) Nebraska, New Hampshire, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Washington, West Virginia, Wisconsin, and England.
Also to the same effect, 26 Ruling Case Law, p. 184 (sec. 155), says: “An individual may be taxed in the State in which he lives on shares of stock in either domestic or foreign corporations,” and at page 290 says: “It is recognized that the property ‘of. the shareholders in their respective shares is distinct from the corporate property, franchises and capital stock and may be separately taxed although the property and franchises of the corporation are also taxed where they are situ*283ated,” and adds, citing Smith, C. J., in Belo v. Commissioners, 82 N. C., 415; 33 Am. Reports, 688: “So, also, tbe shares of stock are taxable to tbe owners, even if tbe capital stock of tbe corporation is exempt from taxation by law.” And in.tbe same volume (26 R. C. L.), at page 289 (sec. 254), it says: “Shares of stock in corporations are a species of intangible personal property which may be taxed to tbe individual owner in tbe State in which be resides, whether tbe corporation is domestic or foreign, even if tbe corporation does no business and owns no property in such State,” citing numerous cases.
As tbe devolution of tbe shares of stock in tbe R. J. Reynolds Company belonging to tbe decedent Briggs passed by operation of tbe laws of tbe State where be died domiciled, and tbe persons to whom it should pass by operation of law or tbe power to convey it by will is solely under tbe control of tbe State of.Rhode Island, it is difficult to see what authority North Carolina has to tax such devolution or interfere with it in any way. If this State could tax tbe right of devolution at all, it could tax it 100 per cent, for there is no provision in tbe Constitution which limits tbe amount of inheritance tax.
If, however, it should be held that tbe shares of stock are tbe property of tbe corporation, it has already been taxed under tbe majority decisions in Person v. Watts and Person v. Doughton, supra, and there has been no devolution of bis property which can be taxed by this State.
Such devolution of bis property is made subject to tbe laws of tbe domicile, and if it is tbe property of tbe corporation, tbe transfer upon tbe books of tbe Reynolds Company is purely a matter of shifting its own property under its own regulations.
In Evans v. Monot (1858), 57 N. C., 227, Pearson, C. J., says: “A share of tbe stock of tbe corporation is a thing incorporeal, a money right which entitles tbe owner to participate in 'the general management of tbe concerns of tbe corporation by being a member in tbe meeting of tbe stockholders to elect officers and do other acts of tbe kind; to demand or receive from tbe corporation a portion of whatever may be on band at its dissolution.” Tbe distinction between ownership of shares of stock of a corporation and ownership of tbe property of a corporation is a fundamental concept of tbe law of corporations. Tbe corporation is an entity like a natural person, and tbe title to its property is vested in it and not in the stockholders. 5 Fletcher on Corporations, sec. 3433; Cook on Corporations (6 ed.), sec. 12, and cases there cited. This in fact is the fundamental idea of a corporation. Tbe stockholders are not liable for its debts, and it is not liable to theirs. While a majority of tbe stockholders can control tbe corporation, it is a'separate and distinct entity.
*284' When a resident of this State invests a sum, whether in livestock or corporation stock, he is liable to taxation thereon, but when a nonresident invests in the stock of a coi-poration located here b.6 has no property liable to taxation in this jurisdiction. Nor can he be taxed here for an inheritance tax when a nonresident. '
In a late case, Welch v. Burrill (1916), 223 Mass., 87, the Court said: “It is impossible to predicate jurisdiction over nonresident shareholders in a foreign corporation merely upon the physical presence of property belonging to that corporation within the territory of the State. . . . That State has no jurisdiction to impose a tax upon such succession. The privilege or commodity of passing title to the stock is the thing which is taxed. That requires no sanction of the laws of that (other) State (where the corporation operates) for its complete and effective legal transition from ancestor to heir or testator to legatee.” That is, this State has no authority to impose the inheritance tax upon the Briggs estate, he being a resident of Rhode Island, simply because he owned stock in a corporation of New Jersey doing business here and which passed to his legatee.or next of kin without the permission or act of this State.
If this State could impose a tax upon the legal devolution of the shares of stock of a nonresident, it could make that tax 100 per cent and turn the whole amount into the treasury of this State.
In another recent case, In re McMullan's Estate (1922), 199 App. (N. Y.) Div.; 393; 192 N. Y. Supp., 49, the Court said on this very point, at page 53:
“It has already been pointed out that the State cannot enforce a . tax upon the transfer of shares of stock of a foreign corporation owned by a nonresident decedent, where neither the corporation nor the owner is within its jurisdiction. Of course, a foreign corporation owning real property located in this State may be subjected to a tax, so far as such property is concerned, upon the ground that the real property in this State constitutes a res, over which the State and its courts may entertain jurisdiction. But this jurisdiction would not apply to a nonresident stockholder of such foreign corporation, for the reason that he is not an owner of the real estate.”
It should be noted that this was not the case of the construction of a statute to determine whether the property taxed was property within the State, but was a question as to whether a tax could be levied by an express statute on the transfer of stock of a nonresident decedent in a foreign corporation owning real estate within New York, which is exactly the case here, and the Court held that there was no jurisdiction in the State (Illinois) of the foreign corporation to levy such tax. This case has been affirmed by the New York Court of Appeals.'
*285In short, it may be said that the decisions are uniform that a State has no jurisdiction to impose an inheritance tax on the transfer of stock of a foreign corporation owned by a nonresident decedent merely because the corporation owns property within the State. Numerous authorities to that effect can be cited, but as it is understood this case will be taken to the U. S. Supreme Court, it is unnecessary to encumber the record with such citations.
In People v. Dennett (1916), 276 Ill., 43, it is said: “The relation of the stockholder to the- property of the corporation has been so long-settled by uniform decisions that it is no longer the subject of discussion. The owner of shares of stock in a corporation is not the owner of the property or of any share of the, property of the corporation, in any legal sense. The stockholders of a corporation completely organized do not hold the relation of partners, and they have neither legal nor equitable title to the property of the corporation.”
There are some States whose constitutions do not require, like the Constitution of this State, that “all moneys, credits, investments in bonds, stocles, joint-stock companies or otherwise, and also all real and personal property, according to its true value in money,” shall be taxed by uniform rule and ad valorem. In some, but not in all of these, the influence of the great corporations and of holders of large blocks of stock has been sufficient to secure the exemption of stocks and bonds from all taxation, but it is believed that this has not been held in any State whose constitution has the same provision as ours, requiring the equal and uniform taxation of all property.
This provision in our Constitution was for the protectioii of those who, not having idle capital to invest in stocks and bonds, are now forced to pay not only taxes upon their own property, but that which should be borne by this immense amount of capital invested in “stocks” and bonds which has been made “tax free.” By legitimate deduction from the statistics of the IT. S. Income Tax Report there is, as above stated, nearly or quite twq thousand millions of dollars invested in stocks of corporations by residents here, and also probably three thousand millions in bonds which is absolutely withdrawn from any taxation whatever, thus made “tax free” by the influence and for the benefit of its owners and to the cost of all others. If, according to the requirement of our Constitution, this immense wealth was taxed equally with investments in livestock, real estate and other property, the wealth-producing property of the community would probably pay less than half of the present burden which is borne by its owners. The tax thereon should be paid by the large holders of this wealth who are equally protected by the laws in their persons and property but who now are exempted from any share thereon of the burden of government and the protection they receive. '
*286“Invesiments in bonds and stocks” being the individual property of the holders thereof, the holders if residents here are taxable thereon, irrespective whether the stock they hold is in corporations incorporated or operated in this State or elsewhere. These stocks are their property, bought with their money or inherited, subject by proper proceeding to payment of their debts, and to be bequeathed or sold'at their will.
It is small compensation for the loss of the taxation upon this immense volume of wealth to attempt to reach out and tax the devolution by death or will of the same kind of property — investments in stocks and bonds — of a nonresident who has received no protection or benefit from our State Government. Whatever protection the company and its property have received presumably has been paid by the property of the corporation here which has been protected, but the nonresident holder of the shares does not owe the State anything. The resident holder of shares of stock, whether domestic or foreign, has been protected in his person and his property, and therefore should pay his fair share of the burdens of the State, county, and municipal governments.
The majority opinion in Person v. Watts, 184 N. C., at bottom of page 508, admits that the Legislature can tax the shares in the hands of its owners, but the language of the Constitution is that the Legislature shall pass laws taxing uniformly and ad valorem all property, specifically reciting therein “investments in stocks and bonds,” and such “investments” every one knows are made by the buyer and not by the corporation that issues the stocks and bonds. The word “Investment" ex vi termini, shows that the holder has invested his money in such property, and the Constitution requires that he shall be taxed on that investment. He is here and has had the benefit of the protection of himself and his property; the investment is recited in the Constitution as property to be taxed uniformly like all others. But the decedent Briggs did not live here, he had no property here. By his death his shares passed by his will or by the statute in the State where he resided. The corporation was here and has been taxed on its property. It is true that when a resident here holds stocks in corporations in another State, such corporations may have paid tax on its property there, but his property, that is, the shares which he can control and sell and receive money for, are here, and he as a holder of such property has been protected and should pay his share of the expenses of the government under which he lives.
Our Constitution imperatively requires that the Legislature shall pass laws taxing by uniform rule and ad valorem all property, and further specifies in section 5 of the same article what property may be exempted. The statute before us exempts an immense amount'of property belonging to those who have idle wealth and not within the list *287of the property which by Constitution, Art. Y, sec. 5, can be exempted. The question before us is which shall govern — the Constitution or the statute. The statute for many years taxed all investments in stock as the Constitution requires, and the opinion in Person v. Watts, supra, says the Legislature can do so now even if it were styled “double taxation” by those wishing to escape all taxation on it. It is no compensation to those thus required to pay the taxes from which “Big Wealth” is unconstitutionally exempted to seek out and collect small amounts from nonresident shareholders, when we are exempting the many millions belonging to resident shareholders.
To exempt from taxation the above enormous investments in stocks and the still larger investment in bonds owned by citizens and residents here, who are protected in their persons and property, by the taxation collected from other citizens whose burdens would be much reduced by the uniform taxation of these investments in stocks and bonds, which the Constitution requires, and to hold that the decedent in Rhode Island, over whom and his property we have no jurisdiction, can be forced to pay the petty sum involved in this litigation, would seem similar to the instance in 'the Scriptures — which is quoted with reverence — “like straining at a gnat and swallowing a camel.”
The consequence of our system of making the stocks and bonds of great accumulations of capital “tax free,” and necessarily “double taxing” all other property, is a great rush of money to invest in “tax-free” stocks and a great pressure for the issuance of bonds that capital may also be invested in “tax-free” bonds. The result is a scarcity of money for use by those who need it for the improvement of farm lands and otherwise, and application to Congress for the creation of land banks and' other devices by which ultimately the owners of farm lands may become mere tenants at will of their creditors.
It is true that the great corporations have great influence and can use it to procure favorable legislation by making their stocks “tax free” in open defiance of the Constitution, but the Constitution was provided for the very purpose of prescribing rules of equality and justice which should not be infringed by any great monetary or other influence, and should be upheld by the courts.
In R. R. v. Comrs., 91 N. C., 454, it is held that “a nonresident holder of shares of a corporation in this State is not liable to tax here. Such property is beyond the jurisdiction of the State and subject only to that in which the holder has a domicile.”
The decisions in Person v. Watts, supra, and Person v. Doughton, supra, went off upon the proposition that a mandamus would not lie in such case though there are many decisions that it will lie. See cases cited in 184 N. C., at pp. 538-541; but aside from that, if the Court had held that the failure to observe the vital constitutional requirement *288that all property, including- “investments in stocks and bonds,” should be taxed equally and uniformly was invalid, it cannot be doubted that the Legislature would have remedied the defect. In any view the failure to collect taxes on the immense amount invested by residents of this State in stocks and bonds, domestic and foreign, cannot be remedied by taxing nonresidents upon the small amount of stocks held by them in corporations doing business in this State as this act attempts to do. We shall do our duty if we tax residents of this State and the property of nonresidents if found here.