Commonwealth v. Delaware DIV. Canal Co., 123 Pa. 594 (Pa. 1889)

Opinion,

Me. Justice Claek :

This case comes here upon an appeal, under the act of 1811, from the settlement by the auditor general and state treasurer, against the Delaware Division Canal Company, for state taxes oil the bonded indebtedness of the company, under the act of June SO, 1885. The claim of the commonwealth is for taxes upon that portion of said indebtedness held by resident owners, at the rate of three mills on the nominal value thereof, for the year ending on the first Monday in November, 1886.

The Delaware Division Canal Company, the defendant, as we learn from the findings in the court below, is a corporation of the state of Pennsylvania, chartered in 1858, and having authorityPjyNojrnwpmqney, issue bonds, and to secure the same by mortgage. During the year ending as aforesaid, the defendant’s bonds, secured by mortgage, were outstanding to the amount of $800,000; of these, $700,000 were held by residents, and $100,000 by non-residents of the state. The company deny the authority of the legislature to require an assessment to be made by the treasurer; and, although they made a return of the amount of the outstanding indebtedness, they refused to assess the tax or deduct it from the interest, as required by the fourth section of the act referred to. The company further contend that by the first section of the act of 1885, all mortgages, money in the hands of solvent debtors, etc., etc., are made taxable at' the rate of three mills “on the dollar of the value thereof annually,” which is the actual value, and, therefore, to create a valid tax on corporate loans the rate must be applied to the actual and not the nominal value thereof, and that the actual value can be ascertained only by assessment in due form of law, upon notice to the holder and with the right of appeal. Their contention is, that, in view of the provisions of the first section of the act, the system of taxation provided for in the fourth section, as to corporate loans, is repugnant to that clause of the constitution which provides that “all taxes shall be uniform upon the same class of subjects, within the territorial limits of the authority levying the tax.” The argument is, that the taxing section

of the act subjects all the taxable subjects therein designated, including corporate loans, to a tax of three mills on the dollar of their value; that all the other subjects are valued and taxed according to such value by the local assessors, while corporate loans are, without being valued and assessed, taxed at tlieir nominal value; that nominal value is not a certain measure of actual value, which is often much greater and often much less ; so that, in many instances, the tax upon corporate obligations is much more, and, in many others, much less, than it would be if imposed upon the actual value.

The case of the Commonwealth v. Lehigh Valley R. Co., 104 Pa. 89, which has been much referred to in the argument of counsel, on the subject of assessment, presented a wholly different question from that involved in this controversy. The taxation there complained of was of corporate bonds, under the act of June 7, 1879, P. L. 112, and its supplement of June 10,1881, P. L. 99. By the express words of these acts, such securities were made taxable at the rate of four mills “ on every dollar of the value thereof,” which was the precise basis for assessment of individual property and securities, under the general revenue system of the state, by the local assessors; the rate only was different. The phrase “ every dollar of the value thereof ” was held to be the actual value ; and as neither the act of 1879 nor 1881 made any provision for the ascertainment of the actual value, it was held that they did not constitute an independent scheme for the taxation of corporate loans, but were to be aided by the machinery of the, act of 1844; for, as the loans were taxable in the hands of resident owners, at their actual value, a legal ascertainment of that value was essential to the assessments. The tax of a citizen, as we there said, is the result of the rate applied to the value of the property he owns, and he is not taxed until the rate is thus applied, by some legal mode of adjustment. It was held further, that neither the return of the amount of the indebtedness, nor the account settled by the auditor general thereon, could be taken as an assessment, for neither the corporation nor the accounting officer of the commonwealth, had any authority to make it; that could not be regarded as an assessment of an ad valorem tax, made by a person whose interests were adverse, who was charged -with no duty, and was under

no oatb or obligation ; where the real party in interest had no notice, no right to interfere if he had notice, and no appeal; as there was no other means of assessment provided by law, it was the duty of the local assessors, in making the general assessment in 1880 and in 1881, to value and assess corporate bonds wherever found in the hands of resident owners, and it was presumed in law that these officers had performed their full duty in the premises. -

But, by the act of June 30, 1885, P. L. 193, the legislature has attempted to supply the machinery, which was found to be wanting in the acts of 1879 and 1881, for taxation of corporate loans, and, in so doing, has adopted substantially the system suggested by the 42d section of the act of April 29, 1844, P. L. 501, relating to the taxation of municipal loans in the hands of resident holders.

By the first section of the act of 1885, all mortgages^money owing by solvent debtors, etc'., are made “ taxable for state purposes, at the rate of three mills on the dollar, of the value thereof, annually.”

By the fourth section, however, it is provided, “that here- • after it shall be the duty of the treasurer of each private corporation, incorporated by or under the laws of this commonwealth, or the laws of any other state, or of the United States, and doing business in this commonwealth, upon the payment of any interest on any scrip, bond, or certificate of indebtedness, issued by said corporation to residents of this commonwealth, and held by them, to assess the tax, imposed,and provided for_ staie__purpose.s......upon the nominal value of each and every said evidence of debt, and to report on oath, annually on the first Monday of November, to the auditor general the amount of indebtedness of the corporation owned by residents of this commonwealth, as nearly as the same can be ascertained; and it shall be his further duty to deduct three mills on every dollar of the interest paid as aforesaid, and return the same into the state treasury,” etc.

By the sixth section, the obligations of public or private corporations, the tax upon which is required by law to be collected by the corporation from the holder, and paid into the state treasury, arc wholly withdrawn from the general and ordinary processes of assessment by the local assessors.

We are clear in onr convictions that if there is any constitutional authority to impose the tax, under the fourth section of the act, the settlement by the accounting officer was rightly made against the company. The act constitutes the company, or its treasurer as such, the collector of the tax, and, upon failure to discharge the duty imposed by law, the settlement is properly made against the company, whose servant he is, as in ease of the default of any other officer of the government, upon whom a like duty is imposed. The obligation rests upon the company, but as the company can only act through its officers, the default of the officer is esteemed the default of the company, and the penalty is visited upon them. The treasurer is designated, in order that there may be no evasion; he has exceptional opportunities to know, and has the power in his own hands to perform the several matters required. This system of collecting state taxes was first introduced under the 42d section of the act of April 29, 1844, P. L. 501, where it is applied to municipal loans, and by the act of April 30, 1864, P. L. 218, was first extended to the loans of private corporations.

In a number of cases, both before and since the adoption of the present constitution, this court has affirmed the right of the commonwealth to impose this duty upon corporations, both public and private: Maltby v. Railroad Co., 52 Pa. 140; Commonwealth v. Phoenix Iron Co., argued at the January term, 1868, and not reported; Delaware L. & W. R. Co. v. Commonwealth, 66 Pa. 69; Commonwealth v. Martin, 107 Pa. 185; and Commonwealth v. Lehigh V. R. Co., 104 Pa. 89. In the last case cited we said: “We can see no constitutional or other difficulty in the way of obliging the officers of corporations, municipal or private, by appropriate legislation, to assess and collect taxes upon their corporate loans or stocks. This method of reaching subjects capable of successful concealment, and liable to escape the notice of the most vigilant assessor, has for many years been recognized as a valid exercise of legislative power.”.“The tax is imposed indiscriminately upon all mortgages, etc., in the hands of the owner or possessor, but the corporation is made the collector of the tax upon the corporate loan. This was the construction put upon the act of April 30,1864, by this court, in the case of Maltby v. Railroad

Co., 52 Pa. 140, and the reasons there assigned are generally applicable here.” The case of Maltby v. Railroad Co., supra, it is true, was overruled in the Supreme Court of the United States, 15 Wall. 800, in so far as it recognized the taxation of bonds in the hands of non-resident owners, but to the extent stated, it is still of undoubted authority. ^

But, assuming the power of the legislature to enforce this J method of collecting, it is contended that the tax is not uniform 1 on the same class of subjects, and is therefore illegal and void; ^ that whilst all mortgages, money in the hands of solvent debtors, etc., are by the act of 1885 made taxable for state purposes, / annually, at the rate of three mills “ on the dollar of the value j thereof,” the like obligations of private corporations are to be assessed, at the same rate, upon “the nominal value.” The j actual value of private or individual obligations for money in/ the hands of solvent debtors is, as a general rule, equivalent to their nominal value. Such obligations are not ordinarily put upon or quoted in the market, and therefore have no variable market value as other securities have; on the contrary, the actual value of corporate securities is dependent upon a variety of conditions, independent of the value of the debtor’s estate— the fluctuations of trade, the date of maturity, the rate of interest, the amount of competition, and generally upon the stringency of the market and the financial condition of the country. Some of these securities, it is said., upon which interest is regularly paid, sell in the market as low as fifty cents, and others, perhaps, as high as one hundred and fifty cents, on the dollar. And it is argued that as by the first section of the act of 1885 individual and corporate obligations constitute a single class of subjects for taxation, the act unjustly discriminates between them in the fourth section, and that therefore the taxes imposed cannot be said to be uniform upon the same class of subjects.

The first section of the act does indicate certain subjects for taxation, at a certain rate, and these may in some sense be said to constitute a general - class ,• but the ., classification -of these subjects is extended by the fourth .section ; one class, consisting of the .securities of private corporatigns,.,ig to be taxed at their nominal valueT^icTtEe residue (excepting the securities of municipal corporations", "which are still taxable

under the 42d section of the act of April 29, 1844) constitute another class, taxable at the same rate, but upon their value to be ascertained under the ordinary processes of assessment by the local assessor.

The new constitution does not withdraw the power of classification from the legislature: Kitty Roup’s Case, 81 Pa. *211; Kittanning Coal Co. v. Commonwealth, 79 Pa. 100; indeed, the power is necessarily implied in the constitutional provision to which'the fourth section of the act of 1885 is supposed to be obnoxious. The power to impose taxes for the support of the government, subject to the limitations of the constitution, still belongs to the legislature; the selection of the subjects, their classification, and the methods of collection are purely legislative matters. When the action of the legislature, with respect to these matters, is not repugnant to the constitution, it would certainly be a case of the grossest inequality, which would call for the intervention of the courts: Kelly v. City of Pittsburgh, 85 Pa. 170. Tt may be conceded, however, that classification should be made according to some reasonable, practical rule, drawn from experience, which would prevent a gross inequality in the burdens of taxation. “It must,” in the language of Mr. Justice AgNEW, “ visit all alike in a reasonably practicable way, of which the legislature may judge, but within the just limits of what is taxation. Like the rain, it may fall upon the people in districts and by turns, but still it must be public in its purpose and reasonably just and equal in its distribution, and cannot sacrifice individual right by a palpably unjust exaction. To do so is confiscation, not taxation ; extortion, not assessment; and falls within the clearly implied restriction in the Bill of Rights: ” Washington Avenue, 69 Pa. 852.

Absolute equality is of course unattainable; a mere approximative equality is all that can reasonably be expected. A mere diversity in the methods of assessment and collection, however, if these methods are provided by general laws, violates no rule of right, if when these methods are applied the results are practically uniform. If there is a substantial uniformity, however different the procedure, there is a compliance with the constitutional provisions: Fox’s App., 112 Pa. 353; even when there may be some disparity of results, if uniformity is

tbe purpose of tbe legislature, there is a substantial compliance: Hunter’s App., 18 W. N. 411, 394; Loughlin’s App., 19 W. N. 517. Nor is classification necessarily based upon any essen-| tial differences in the nature or, indeed, the condition of the li various subjects; it may be based as well upon the want of ! adaptability to the same methods of taxation, or upon the j impracticability of applying to the yarious subjects the same j methods, so as to produce just and reasonably uniform results, ' or it may be based upon well-grounded considerations of public policy.

Hence it is that some classes of corporations are taxed upon net earnings, or income; others upon capital stock, the value thereof to be ascertained by their annual dividends, or in a certain event upon the actual value of the shares; others upon their gross receipts; insurance companies upon the gross amount of their premiums; coal and mining conrpanies at a specific sum for every ton of coal mined, etc. ^

Real estate, for taxation, has been classified as seated andf unseated, and for municipal purposes may, perhaps, admit of l\ further classification: Kitty Roup’s Case, supra. Collateral l ] inheritances are distinguished from those that are direct, the for- J mer being subject to taxation, the latter not. Foreign insurance companies have been distinguished from domestic companies, and taxed independently and differently: Germania Ins. Co. v. Commonwealth, 85 Pa. 515. So, trades, professions, callings, and even single men have been taxed by classification, and it has been said that professional men may be classified as physicians, lawyers, clergymen, etc.; tradesmen as merchants, mechanics, etc.; and other persons as bankers, manufacturers, etc., and a uniform tax assessed upon each class: Banger’s App., 109 Pa. 79. Not only have taxes been laid in all these various forms, rated on values, on dividends or profits, on premiums, on net earnings, and on gross receipts, but also by specific sums on specific articles. The road bed, station houses, rolling stock and equipments of a railroad company; the canal bed, and berm banks, the locks, lock houses, etc., of a canal company; the banking house or place of business of a banking company,, etc., are withdrawn from the ordinary processes of general taxation and are reached in a tax upon capital stock, which has always been regarded as a tax upon the property and

assets. These several classifications and departures from uniformity in methods, were intended simply to bring about a just uniformity in results. So, places of amusement and the luxuries of life may be taxed in relief of the necessaries. Pious ehold and kitchen furniture, gold and silver plate, exceeding a certain value, pleasure carriages, and gold and silver watches, kept for use, prior to the act of May 13, 1887, P. L. 114, were selected from the like articles in.trade, and from other articles of personal property, and with money at interest, were subjected to a special tax. Illustrations might be multiplied to show that classification does not depend upon differences in the physical nature or condition of the subjects selected, but upon a variety of considerations.

Corporate obligations by the fourth section of the act of 1885 are taken out of the general designation of subjects contained in the first, and as a distinct class are subject to a different standard of valuation, and the tax to a different method of collection. There are several reasons why corporate and individual obligations should be distinguished, in classification, not arising wholly out of any essential difference in their physical nature perhaps, but out of want, of adaptation in our general tax laws to reach them, in the ordinary methods of taxation. They are, as a class, transferable by delivery, and therefore capable of concealment. The transactions out of which individual securities originate in the ordinary course of business for the loan of money, have more or less publicity. Experience has shown that the ordinary methods of valuation, as to these, do not fail of enforcement. But in the case of corporate loans, whilst corporate mortgages may be recorded in one city or county, the bonds may be found in the pocket of the holder in another city or county of the commonwealth. Experience has taught us that, in the ordinary processes of valuation, they are not found; the law, generally applicable, lacks adaptation to the discovery of this quality of obligations. Moreover, their negotiability gives them a commercial quality; a vast brood of bonds is covered by a single mortgage, and as they are issued they fly from hand to hand throughout the whole commercial world: it is only upon their annual return at the interest periods that their ownership can be ascertained. These securities constitute one of the commodities on sale in

the market; they are sensitive in many instances to the conditions which affect the price of stocks. They are subject to great fluctuations, caused by the condition of the money market, or the condition of the country, and sometimes by artificial or even accidental means. Well-informed men must differ greatly in their estimate of the value of such property. The stock market exhibits changes in the quotations daily, sometimes hourly. Presumptively, however, the nominal value is the true value of securities yielding and paying interest, and the legislature has therefore fixed the nominal value, or the par value, for the purpose of taxation. These peculiarities of corporate securities, with others, perhaps, that might be mentioned, arising partly from their nature and properties, and partly from a want of adaptation in our general system to reach this quality of subjects, give rise to their distinct classification.

The moment we concede the power to classify we have disposed of the question of uniformity, for then all that is required by the constitution is that the taxes shall be uniform upon the members of a class: Kitty Roup’s Case, supra. Classification for purposes of taxation, as a general rule, is a matter for the legislature ; it is the uniformity of taxation, according to that classification, which is for the courts, and it is plain that the act of 1885, having constituted corporate loans in the hands of resident holders a distinct class, does not discriminate against any member of that class. The tax is not upon the corporation, it is upon the holder of the corporate bonds; and the holder may be am individual, a partnership, a banker or broker, or a private corporation; the law is general, and applies to all holders. Whether the tax is paid or not is a matter of indifference to the corporation, for if they pay it, they may defalk it from the interest. The tax being paid by the debtor, out of the interest he pays to the creditor, we cannot see that there is any ground of complaint, that the obligations are taxed at their face value; the tax is to be deducted from the interest, and the payment of the interest, by the debtor himself, is presumptive evidence of his solvency: Commonwealth v. Phoenix Iron Co., supra. As to the power of the legislature, under such circumstances, to fix the face value of the obligation as the value for taxing purposes, vve think there can

be no doubt. “ The right of the financial officers of the corporation,” says Chief Justice Thompson, in Del. L. & W. R. Co. v. Commonwealth, 66 Pa. 66, “to retain the three-mill tax, under the act of 1844, out of the interest payable to loan or bondholders of the company, under the act of April 30, 1864, without an assessment by the county commissioners, or assessing officers, was maintained to be undoubted in Maltby v. Reading & Columbia R. Co., 52 Pa. 140, and re-asserted in Commonwealth v. Phoenix Iron Co., not yet reported. The question is therefore settled.” To the same effect are Susquehanna Canal Co. v. Commonwealth, 72 Pa. 72; Buffalo & Erie R. Co. v. Commonwealth, 3 Brewst. 374, and Commonwealth v. Martin, 107 Pa. 185.

The act of 1844 was the beginning of our present revenue system. That act repealed all laws theretofore passed for levying taxes for state purposes. The methods provided by the 42d section of that act for assessment and collection of state taxes on municipal bonds, has met the approval of the profession, and has in all cases been recognized as valid by the courts. A reference to the cases already cited will abundantly verify this statement. The fourth section of the act of 1885 is a substantial copy of the 42d section of the act of 1844; its purpose was simply to apply the same system to the taxation of corporate loans. It has proved to be an efficient and just method of collecting taxes upon this class of securities; it is easy of enforcement and precludes the escape of large amounts of taxable property, which would evade collection in the ordináry methods, and we are of opinion that it is in no way repugnant to the provisions of the constitution.

Although there is some diversity in the methods of procedure, as well as in the standard of valuation in the taxation of individual and corporate obligations, there is, in fact, no great disparity in results; the difference is more apparent than real. Individual mortgages, money in the hands of solvent debtors, etc., are ordinarily — indeed, we think universally — valued at their face. The actual value of an individual mortgage, or of an obligation for money in the hands of a solvent debtor, is presumptively its face value. If the mortgage is bad, or the obligor is not solvent, the debt is not taxable; if, on the contrary, they are good, the common experience of business men

is that the face value is the actual value, ascertained in the ordinary modes of assessment.

But in Fox’s App., 112 Pa. 837, it was held that the tax on mortgages, etc., imposed by the first section of the act of 1885, does not extend to such securities, held by private corporations; that these are reached by the tax on capital stock, under the act of 1879. The fourth section of the act of 1885 only requires the treasurer of the corporation to assess the tax imposed by the first section, and as there is no tax imposed by that section, on mortgages, etc., in the hands of private corporations, it follows, of course, that they axe not to be assessed in this form or any deduction made for taxes from the interest thereon.

Foreign corporations exercising their franchises under the laws of other states and countries, are beyond the reach of our processes of taxation. W e could not require them ordinarily to comply with any such regulation of our law, and therefore they are necessarily excluded from the provisions of the act. Such, foreign corporations as are engaged in business in the state, might doubtless be required to comply, as a condition of their right so to do, but this could only embarrass the action of the local assessor, and upon this ground doubtless they were wisely excluded from the operation of the act.

We axe of opinion, therefore, fox the reasons given, that the treasurer of the Delaware Division Canal Company was bound to make this assessment and to deduct the tax oft' the interest paid. The word, “ of,’ in the 4th section was doubtless intended for, “ off ”; this is a manifest blunder, and cannot be permitted to change the plain meauing of the legislature.

According to the findings of the learned judge of the court below, $800,000 of the bonds of the Delaware Division Canal Company wore outs tan ding at the time specified in the return : of these $100,000 were held by non-residents of the state, and $415,000 by corporations of the state of Pennsylvania; the residue being* $285,000 therefore, is all that would appear to be subject to the tax imposed by the first and fourth sections of the act of 1885.

That the defendants have a legal standing to contest the constitutionality of the law, and the validity of the settlement, we have no doubt; if the tax were illegal the company would

have been under no obligations to retain it, or to pay it to the state.

Tbe judgment is therefore reversed, and judgment is now entered against the defendant, and in favor of the commonwealth in the sum of $940.50, with interest at the rate of twelve per cent per annum from June 27,1887, and costs.