U.S. Supreme Court SCHUYLKILL TRUST CO. v. COMMONWEALTH OF PENNSYLVANIA, 296 U.S. 113 (1935)

[Page 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.

Mr. Justice ROBERTS delivered the opinion of the Court.

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. [Footnote 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.

[Page 296 U.S. 113, 115]

that form of exaction certain securities, such as United States bonds and national bank shares, are eliminated from tax by deduction of their value from the value of the total assets of the corporations which own them. The deduction of exempt securities is made to avoid double taxation; the theory being that the shares issued by a corporation and its capital stock are identical so that taxation of the one is taxation of the other. [Footnote 3]

On June 13, 1907, the General Assembly adopted an act prescribing another method of taxation in the case of trust companies. Its pertinent provisions are copied in the margin. [Footnote 4] This statute in terms lays a tax upon shares rather than upon corporate assets. The value of each share is to be ascertained by adding the value of capital stock paid in, surplus, and undivided profits, and dividing the total by the number of outstanding shares. Thus the exaction is measured by the value of the company's net assets. This involves the exclusion of corporate liabilities from the measure of value to which the rate is to be applied. [Footnote 5] By sucessive amendments it was di-

[Page 296 U.S. 113, 116]

rected that the value of each share of stock should be ascertained by adding together so much of the amount of capital stock paid in, surplus, and undivided profits as is not invested in the shares of stock of corporations liable to pay to the commonwealth a capital stock tax or tax on shares, or relieved from the payment of capital stock tax or tax on shares, and dividing the sum by the number of outstanding shares. [Footnote 6] These amendments were combined with the original act, in a single statute of April 25, 1929.7

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. [Footnote 8]

[Page 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.

First. The appellant insists that as merely a portion of the net assets of the corporation is taken as the basis or measure of the tax it cannot be upon the shares as shares. The appellee relies upon the statement of the Supreme Court of Pennsylvania that the levy is upon the shares and no upon assets. The appellant asks us to find to the contrary. We give great weight to the characterization of a tax, or the interpretation of a state law, emanating from the highest court of the state, but where a federal question is involved we are not bound by the label attached to the tax or the character ascribed to the law. We must determine for ourselves the true nature of the tax by ascertaining its operation and effect. [Footnote 10]

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. [Footnote 11]

[Page 296 U.S. 113, 121]

were included in the base or measure of the tax. It is undenied that these shares had been taxed to the trust company, as permitted by R.S. 5219, as amended (12 USCA 548), and in accordance with the applicable statutes of Pennsylvania;12 and it must be conceded that having once been taxed to their owner, the trust company, they may not again be made the base or measure of a tax to that company's stockholders. Bank of California v. Richardson, 248 U.S. 476, 39 S.Ct. 165. The trial court seems to have excluded them upon the theory that they were not within the intent of the taxing statute, which the court thought meant to exempt only shares of Pennsylvania corporations which had been taxed or relieved from tax by local law. This view the trial court appears to have abandoned in a later case,13 where it was held that stock of a federal reserve bank was within the meaning of the Pennsylvania act and entitled to exemption. This later decision was affirmed by the Supreme Court of Pennsylvania. [Footnote 14]

We are told that the matter is not open here for the reason that it was not raised on appeal to the Dauphin county court, was not discussed by that court, and consequently the Supreme Court refused to consider it. Whether the point was in fact raised in the court below is itself a federal question, and we are bound to examine the record to resolve it. [Footnote 15] It appears that in the specifications of objection filed in Dauphin county court complaint was made that, whereas there should have been a flat deduction of all shares of corporations theretofore taxed or exempted from tax, shares of the Philadelphia

[Page 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. [Footnote 16] Dupuy v. Johns, 261 Pa. 40, 46, 104 A. 565.

[Page 296 U.S. 113, 131]

to bonds of municipal corporations, and also to deposits in savings banks. Again the protest of discrimination was unavailing to defeat the tax. After quoting from Hepburn v. School Directors and Adams v. Nashville, the court went on to say (121 U.S. 138, at page 161, 7 S.Ct. 826, 838): 'The only limitation, upon deliberate reflection, we now think it necessary to add, is that these exemptions should be founded upon just reason, and not operate as an unfriendly discrimination against investments in national bank shares.' The same note is sounded in Aberdeen Bank v. Chehalis County, supra. Even though the investments subjected to a lighter tax are to be classed as moneyed capital, this is unavailing without more to condemn the classification as unlawful. Unless the favored moneyed capital is in substantial competition with the business of national banks, the preference is innocent in aim and harmless in result. At least, the harm, if any, is too remote and dubious to vitiate the tax. First National Bank v. Hartford, 273 U.S. 548, 552, 47 S.Ct. 462, 59 A.L.R. 1; Minnesota v. First National Bank, 273 U.S. 561, 568, 47 S.Ct. 468; First National Bank v. Anderson, 269 U.S. 341, 348, 46 S.Ct. 135; First National Bank v. Louisiana Tax Commission, 289 U.S. 60, 65, 66 S., 53 S.Ct. 511, 87 A.L.R. 840; cf. Hibernia Savings Society v. San Francisco, 200 U.S. 310, 314, 315 S., 26 S.Ct. 265, 4 Ann.Cas. 934. The conclusion is even clearer where the investment may not properly be classified as moneyed capital at all. [Footnote 17]

[Page 296 U.S. 113, 133]

For reasons stated in Bank of California v. Richardson, , 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.

Mr. Justice BRANDEIS and Mr. Justice STONE join in this opinion. Footnotes

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 11 See note 8, supra.

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.