1. A corporation made liable in the first instance for a state
tax on its shares, which it may pay from its funds or collect from
the shareholders, but for which no lien is given either to the
corporation or to the State, has a standing to contest the validity
of the tax. P.
296 U. S.
118.
2. Much weight attaches to the characterization of a state tax,
or the interpretation of a state law, by the state supreme court,
but where a federal question is involved, this Court must determine
for itself the true nature of the tax by ascertaining its operation
and effect. P.
296 U. S.
119.
3. A Pennsylvania tax, levied in the first instance on a trust
company and in terms a tax upon its shares, was measured by so much
of the company's net assets as remained after deducting the amounts
represented by shares owned by it in Pennsylvania corporations
which were already taxed or were exempted by the state law. No
corresponding deduction was made on account of nontaxable bonds of
the United States and of its instrumentalities, or on account of
national bank shares already taxed as permitted by R.S., § 5219.
Held invalid as discriminating against the federal
securities and national bank shares. Pp.
296 U. S. 119,
296 U. S.
120.
4. Whether a federal question, urged to this Court on an appeal
from the supreme Court of a state, was raised in that court is
itself a federal question which this Court must decide by an
examination of the record. P.
296 U. S.
121.
315 Pa. 429, 173 A. 309, reversed.
Appeal from a judgment affirming a judgment for a tax entered by
the Court of Common Pleas of Pennsylvania, 38 Dauphin Co.Rep. 22,
upon an appeal from a tax assessment.
Page 296 U. S. 114
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. [
Footnote 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.
Prior to the year 1907, Pennsylvania trust companies were liable
for what is known as a capital stock tax, levied upon the
corporation. In the administration of
Page 296 U. S. 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 successive amendments, it was directed
Page 296 U. S. 116
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. [
Footnote 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. 117
It will be observed that, by the amendments to the Act of 1907,
the measure of the tax is not in any sense the value of the shares
as such, but a value reflected by
so much of the net
assets as is not represented by shares of Pennsylvania corporations
already taxed or exempt from tax. In the administration of the act
as amended, the procedure which has been followed and approved
[
Footnote 9] is first to deduct
the liabilities from the total assets, thus arriving at the net
assets. The theory has been the exempt shares owned by the trust
company must be shown to have been actually purchased out of
capital stock or surplus in order to obtain a deduction of their
full value from the gross assets. If the company is unable to
demonstrate that they were purchased in that manner, then a
proportional method of deduction is adopted. This is to apply to
the taxed value of all such exempt securities a fraction, the
numerator of which is the net assets and the denominator the gross
assets. The result of applying this fraction to the taxed value of
exempt shares is said to give the proportion of those exempt shares
attributable to capital, surplus, and undivided profits, and the
quotient is accordingly deducted from the value of the net assets
to obtain the measure of the tax on all the shares, and this,
divided by the number of outstanding shares, gives the measure of
the tax for each share. In the instant case, the trust company held
amongst its assets shares of Pennsylvania corporations, exempt from
tax, of the value of $135,787. It also held shares of the
Philadelphia National Bank of the value of $20,202. These were
found by the Department of Revenue to have been taxed at a total
taxable value of $71,373. Applying the fractional formula
mentioned, it was found that $8,886 of their taxable value should
be attributed to capital, surplus, and undivided profits, and
deducted from the
Page 296 U. S. 118
amount of the net assets. As the net assets had been ascertained
to be $467,714, the deduction brought this figure down to $458,028,
to which the rate of tax of 5 mills was applied.
It should be stated that, under the Act, the corporation is
required to make a report as the basis for the calculation of the
tax, and, upon that report, the Department of Revenue settles the
tax which is assessed against the corporation. The trust company,
and not the stockholders, is liable in the first instance for the
tax. Though given the right to pay the tax from its funds or to
collect the amount from its stockholders, neither the company nor
the Commonwealth is given any lien upon the stock for the amount of
the tax. As the obligation to pay the Commonwealth is that of the
company, its interest and its right to contest are beyond
question.
In specifications of objection filed with its appeal from the
tax settlement in the Court of Common Pleas, the trust company
insisted that all exempt shares (including the shares of the
Philadelphia National Bank) should be deducted from the gross
assets in full. This would exempt their full value, rather than a
proportion of their taxed value as ascertained by the use of the
proportional method above described. The further objection was made
that the method of settlement adopted resulted in discrimination
against exempt securities issued by the United States or other
federal instrumentalities, and that these should have been deducted
at their full value from the gross assets before any computation of
the tax. The Common Pleas Court overruled these objections (without
discussing the treatment of the national bank shares), saying with
respect to United States bonds and like exempt securities that, as
the tax was a tax upon shares, and not upon the assets of the trust
company, those securities had not in fact been taxed. In affirming
the judgment, the Supreme Court of Pennsylvania said that, as
Page 296 U. S. 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 not 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. 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 States
securities. [
Footnote
11]
Page 296 U. S. 120
We think that the issue of discrimination is not to be resolved
by a choice between the two contentions as to the nature of the
tax. The point is that the State has chosen a portion only of the
net assets of the corporation as a measure of the tax, whether the
exaction be from the company or its shareholders. The State has
exempted certain assets on the theory that to measure the tax in
part by their value would, in effect, be to tax them twice. If to
measure the shareholder's tax by inclusion of these taxed or
exempted securities found amongst the company's assets would be to
tax the shareholder in virtue of the company's ownership of those
securities, it seems clear that to refuse to exempt United States
securities from the measure of the tax is to lay a tax reckoned
upon their value. To put it otherwise, if to exclude securities
already taxed or exempted from tax pursuant to the policy of the
Commonwealth avoids double taxation, to include United States
securities in the measure of the tax seems inevitably to increase
the burden of the tax by reason of their ownership. If the burden
of the tax be lifted in respect of some securities (as it is by
confession from those issued by certain Pennsylvania corporations),
it must necessarily fall on the remaining securities owned by the
company. If the tax is lifted from the shares of certain trust
companies because those companies own only stocks already taxed or
relieved from taxation by the State, and shares in other trust
companies are taxed amongst whose assets there are United States
bonds or other securities entitled to exemption because issued by
federal instrumentalities which are figured in the base of the tax,
it is impossible to avoid the conclusion that the law discriminates
in favor of the former and against the latter solely by reason of
ownership of such federal securities.
Second. It is indisputable that the shares of stock of
the Philadelphia National Bank owned by the appellant
Page 296 U. S. 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, and in accordance with the applicable
statutes of Pennsylvania; [
Footnote 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. 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, [
Footnote
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. 122
National Bank were included in shares granted only a
proportional deduction. It further appears that, in accordance with
Pennsylvania practice, after the trial of the cause to the court
without a jury, the appellant submitted requests for conclusions of
law. Amongst these were requests 10 and 16, which referred
specifically to the Philadelphia National Bank stock, and severally
requested the court to find (a) that these shares having been once
taxed under another act, to the trust company as owner, could not
be taxed a second time, and (b) that the failure to deduct the full
value of the shares from the net assets of the trust company
operated to discriminate and impose a tax upon the shares of stock
in violation of R.S. § 5219, they having once been taxed under
another statute. The court answered both these requests in writing,
"Refused." The refusal of the requests was made the subject of
exceptions which quoted the requests and the answers of the court
verbatim. The exceptions were overruled by the court, and errors
were assigned to the Supreme Court of Pennsylvania to the
overruling of the exceptions applicable to the refusal of the
requests in question, which were again quoted verbatim, with the
answer of the court to the request and the overruling of the
corresponding exception. In addition to these assignments of error,
the appellant, in the statement of questions involved, required by
the rules of the Supreme Court of Pennsylvania to be made a part of
the brief on appeal, amongst others, set forth the following
question:
"Are assets consisting of national bank shares to be eliminated
from consideration in determining the taxable value to which the
rate of tax is to be applied by deducting their actual value from
the value of the net assets? Answer of the court below No."
We think that, notwithstanding the Dauphin County Court, in its
opinion, failed to discuss this matter, as the Supreme Court of
Pennsylvania points out, the question was sharply presented to that
court and decided by it, and
Page 296 U. S. 123
that the rights of the appellant were specifically preserved and
pressed at every stage of the proceeding. We find, therefore, that
the question is here for decision. It might well be disposed of by
reference to what has already been said with respect to bonds of
the United States and like securities. The discrimination here
disclosed is, however, more obvious than in the case of the other
securities mentioned. The Commonwealth of Pennsylvania elected to
exempt certain shares of stock of its own corporations because they
had already been taxed. It exempted them because to include them in
the base would be, in effect, to tax them a second time. The shares
of the Philadelphia National Bank had also been taxed pursuant to
R.S. § 5219, and if they were to be treated on an equal footing
with shares of domestic corporations, the State was bound to afford
them a similar exemption from a second exaction.
Third. The appellant argues that if, as declared by the
Supreme Court of Pennsylvania, the tax is one upon shares as such,
it cannot be laid or collected by the Commonwealth in respect of
166 shares of stock of the appellant which, by confession, are
owned by individuals citizens and residents of States other than
Pennsylvania, for the reason that such shares have no taxable situs
in Pennsylvania. In view of the grounds of our decision, we find it
unnecessary to pass upon this contention.
The judgment must be reversed, and the cause remanded for
further proceedings not inconsistent with this opinion.
[
Footnote 1]
38 Dauphin County Reports 22.
[
Footnote 2]
315 Pa. 429, 173 A. 309.
[
Footnote 3]
Commonwealth v. Standard Oil Co., 101 Pa. 119, 145;
Commonwealth v. Fall Brook Coal Co., 156 Pa. 488, 26 A.
1071;
Commonwealth v. Pennsylvania R. Co., 297 Pa. 308,
314, 147 A. 242;
Commonwealth v. Eastern Securities Co.,
309 Pa. 44, 163 A. 157.
[
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."
L. 1907, Act No. 512, p. 640.
[
Footnote 5]
Commonwealth 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. The Act of April 9, 1929, P.L. 343, §§ 807 and 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;
Des Moines National Bank v. Fairweather, 263 U.
S. 103.
[
Footnote 9]
Commonwealth v. Hazelwood Savings & Trust Co., 271
Pa. 375, 114 A. 368.
[
Footnote 10]
Senior v. Braden, 295 U. S. 422,
295 U. S.
429.
[
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.
[
Footnote 13]
Commonwealth v. Provident Trust Co., 40 Dauphin County
146, 177.
[
Footnote 14]
319 Pa. 385,180 A. 16.
[
Footnote 15]
Carter v. Texas, 177 U. S. 442,
177 U. S. 447;
Ward v. Love County, 253 U. S. 17,
253 U. S.
22.
MR. JUSTICE CARDOZO (dissenting).
I think the judgment under review is right insofar as it permits
the inclusion of government bonds as factors of value in the
assessment of the tax, and wrong only insofar as it violates a
provision of § 5219 of the United States Revised Statutes by the
inclusion of shares in the Philadelphia National Bank.
Page 296 U. S. 124
The tax in controversy is not laid upon the capital of the trust
company. It is laid upon the shares; payment being made in the
first instance by the corporation as the agent of the shareholders
with a remedy over for moneys so advanced.
Home Savings Bank v.
Des Moines, 205 U. S. 503,
205 U. S. 518;
Commonwealth v. Merchants' & Manufacturers' National
Bank, 168 Pa. 309, 31 A. 1065,
aff'd, 167 U. S. 167 U.S.
461;
Commonwealth v. Mortgage Trust Co., 227 Pa. 163, 76
A. 5;
Commonwealth v. Union Trust Co., 237 Pa. 353, 85 A.
461;
Northern Trust Co. v. McCoach, 215 F. 991;
cf.
76 U. S.
Kentucky, 9 Wall. 353,
76 U. S. 362;
Aberdeen Bank v. Chehalis County, 166 U.
S. 440,
166 U. S.
444-445. The tax being laid upon the shares, and not
upon the capital, the Constitution does not make it necessary in
the assessment of the tax to reduce the value of the shares to the
extent that bonds of the national government are included in the
capital. This is settled law.
Van Allen v.
Assessors, 3 Wall. 573;
Cleveland Trust Co. v.
Lander, 184 U. S. 111;
Des Moines Bank v. Fairweather, 263 U.
S. 103,
263 U. S. 112;
Educational Films Corp. v. Ward, 282 U.
S. 379,
282 U. S.
390.
The argument for the appellant is that the tax might have been
lawful if the shares had been valued without any deductions growing
out of the nature of the capital, but that, the moment a deduction
was allowed in respect of any class, there was an unlawful
discrimination against government securities unless the deduction
was enlarged and made applicable to them. The attack is thus
confined to amendments of the act which were placed upon the
statute books in three years (1923, 1927, 1929), for there was no
deduction of any kind under the act as first adopted in 1907. These
amendments provide that the assessment shall be reduced by
deducting therefrom (1) such part of the assets of the trust
company as is invested in shares of other corporations taxed by the
Commonwealth
Page 296 U. S. 125
of Pennsylvania upon capital or shares (1923, July 11, P.L.
1071, 1072, reenacted by 1927, May 7, P.L. 853, 855, 1929, April
25, P.L. 673, 675), 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). 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.
* Dupuy v.
Johns, 261 Pa. 40, 46, 104 A. 565.
Page 296 U. S. 126
At the time of the assessment, the appellant was the owner of
shares in corporations that paid a tax upon their capital to the
Commonwealth of Pennsylvania. Purdon's Pennsylvania Statutes, Title
72, § 1871. These shares will be described for convenience as
investments in class No. 1. Except for certain shares in the
Philadelphia National Bank, which will be separately considered,
the assets did not include an interest in corporations that paid a
tax upon their shares as distinguished from one upon their capital.
The appellant was also the owner, or so it will be assumed, of
shares of stock in manufacturing corporations that were relieved
from any tax. These shares will be described for convenience as
investments in class No. 2. The holding now is that the deduction
of the shares of either of these classes is an act of
discrimination forbidden by the national Constitution unless
investments in obligations issued by the national government are
accorded the same favor.
I read the cases otherwise. The statute was not passed as an act
of "unfriendly discrimination" (
Adams v. Nashville,
95 U. S. 19;
Mercantile Nat. Bank v. New York, 121 U.
S. 138,
121 U. S. 161;
Aberdeen Bank v. Chehalis County, supra, at p
166 U. S. 461)
against the national securities, nor was it passed in aid of
classes of investments with which the national securities are in
substantial competition. In the absence of one or other of these
motives or results, the prejudice, if
Page 296 U. S. 127
any, is too remote to be forbidden. There is no room in the
solution of problems of this order for doctrinaire definitions,
heedless of practical results.
Metcalf & Eddy v.
Mitchell, 269 U. S. 514,
269 U. S.
523-524.
"In a broad sense, the taxing power of either government, even
when exercised in a manner admittedly necessary and proper,
unavoidably has some effect upon the other."
Metcalf & Eddy v. Mitchell, supra, at p.
269 U. S. 523.
A sterile formalism would quickly lead to an impasse, the
activities of the States checked because of an indirect effect upon
the agencies of the federal government, and the federal activities
checked for fear of a like effect upon the agencies of the States.
One must view the subject in a large way if government is to go on
at all.
Educational Films Corp. v. Ward, supra, at p.
282 U. S. 390,
and cases there cited;
Pacific Co. v. Johnson,
285 U. S. 480,
285 U. S. 489;
Trinityfarm Co. v. Grosjean, 291 U.
S. 466;
Willcuts v. Bunn, 282 U.
S. 216,
282 U. S.
225-226;
Helvering v. Powers, 293 U.
S. 214,
293 U. S.
225.
"Unfriendly discrimination" might be inferred if securities of
every kind were excluded from the reckoning with the single
exception of the obligations of the national government. That would
be an extreme case, the conclusion hardly doubtful. Even though
hostility were not so pointed as in the case supposed, there might
still be an invidious distinction if securities in substantial
competition with evidences of indebtedness issued by the national
government had been given a preferred position. Nothing of the kind
appears. "For reasons of public policy, and not as an unfriendly
discrimination" (
Aberdeen Bank v. Chehalis County, supra,
at p.
166 U. S.
461), the value of a share in a trust company is to be
ascertained by excluding from the assets the shares in other
corporations that are liable to the State for a tax upon their
capital. Let it be assumed, for illustration, that a trust company
is the owner of shares of stock in a department shore doing
business in Philadelphia. Under the statutes of Pennsylvania, a
business
Page 296 U. S. 128
of that kind pays a tax upon its capital. A trust company does
not. If it did, a hardship akin to that of double taxation would
result if its interest in the department store were made use of to
magnify its burden. But the process of taxation does not end at
that point. By the plan of the statute, the assessor passes over
the trust company and lays the tax upon the shareholders. The same
considerations of fair dealing and equality are then applicable to
them. So at least the Legislature of Pennsylvania might not
unreasonably believe. Never before has it been held that, out of
deference or favor toward the securities of government, a state is
disabled from framing its system of taxation along lines of equity
and justice.
Hepburn v. School
Directors, 23 Wall. 480,
90 U. S.
485.
What is true of investments in class number 1 is true also of
investments in class number 2. "For reasons of public policy, and
not as an unfriendly discrimination" (
Aberdeen Bank v. Chehalis
County, supra), corporations organized for laundering, for the
processing and curing of meats, and for manufacturing within the
State have been relieved by Pennsylvania from liability for a tax
upon their capital. The motive dictating that exemption is the
desire to induce capital to come or stay within the State when
employed in forms of enterprise believed to be important for the
good of the community.
Dupuy v. Johns, supra; Commonwealth v.
Barnes Bros. Co., 5 Dauph. 75, 77;
cf. New York State v.
Roberts, 171 U. S. 658,
171 U. S.
665-666. In promotion of the same policy, the shares of
corporations thus relieved from liability for a tax are excluded
from the reckoning when shareholders in trust companies are taxed
upon the value of their holdings. The reckoning does not exclude
the bonds or notes or other evidence of indebtedness of
corporations of any kind, foreign or domestic. It does not exclude
the shares of any corporation not engaged in the enumerated forms
of business, except insofar as such other corporations have
already
Page 296 U. S. 129
paid a tax upon their capital or shares. It does not exclude the
shares of manufacturing corporations, except to the extent of the
capital employed in Pennsylvania. The deduction is limited in range
and beneficent in aim.
The situation, then, is this: vast classes of securities, bonds
and notes of every kind, as well as shares of stock in many and
varied enterprises, are in the same position for the purpose of the
tax in suit as government bonds and notes. The few investments that
occupy a different position are not comparable in kind or in
attractiveness to the obligations of the government, and do not
substantially compete with them. To hold that there was
discrimination here in any forbidden sense is to hold that bonds
and notes of the United States must be deducted from the value of
the shares if there is a deduction of any form of investment, no
matter how minute in amount or alien in quality. Assume, for
illustration, an exemption of the shares of corporations engaged in
the manufacture of books or in the sale of works of art, an
exemption accorded in furtherance of a policy to foster art and
letters. If the prevailing opinion stands, the policy in such a
case must be abandoned, or the federal bonds included. Assume again
that laundering corporations only had been relieved by Pennsylvania
from liability for a tax upon their capital. Laundering
corporations, as we have seen, were actually relieved, but
manufacturing corporations also. The prevailing opinion, if it
stands, would bring us to a holding that laundering corporations
could not be favored without hostility and peril to the Treasury at
Washington. This is to lose sight of the essence of discriminatory
statutes, and to stick in the bark of a hard and narrow
verbalism.
From such incongruities and excesses, the avenue of escape is
clear. It is to be found in the acceptance of the test put forward
in this opinion. The discrimination, as
Page 296 U. S. 130
has been said, must be so marked as to justify the inference
that it was unfriendly in design, or at the very least it must
favor forms of investment that are in substantial competition with
government securities. A helpful analogy is found in the taxation
of national banks. By R.S. § 5219, as amended, 12 U.S.C. § 548, the
several states may tax the shares of national banks, but
"the tax imposed shall not be at a greater rate than is assessed
upon other moneyed capital in the hands of individual citizens of
such State coming into competition with the business of national
banks."
There are many cases in this Court expounding that enactment.
Hepburn v. School Directors, supra, was a case where a
statute of a state had given exemption from taxation to "all
mortgages, judgments, recognizances, and moneys owing upon articles
of agreement for the sale of real estate." The court assumed that
the exempt investments might be ranked as moneyed capital. The tax
upon the bank shares was nonetheless upheld. The exemption was
partial only. "It was evidently intended to prevent a double burden
by the taxation both of property and debts secured upon it."
Id. at p.
90 U. S. 485.
There was no token of a hostile purpose. "It could not have been
the intention of Congress to exempt bank shares from taxation
because some moneyed capital was exempt."
Ibid. Adams
v. Nashville, 95 U. S. 19, was a
case where a municipal ordinance gave exemption from taxation to
the municipal bonds. Again, the ruling was that this exemption of
particular property did not affect the validity of the tax upon the
shares.
"The plain intention of that statute [R.S. § 5219] was to
protect the corporations formed under its authority from unfriendly
discrimination by the States in the exercise of their taxing power.
. . . It was not intended to cut off the power to exempt particular
kinds of property if the legislature chose to do so."
Ibid. Mercantile Nat. Bank v. New York,
121 U. S. 138, was
a case where exemption had been given
Page 296 U. S. 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 ( p.
121 U. S.
161):
"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,
273 U. S. 552;
Minnesota v. First National Bank, 273 U.
S. 561,
273 U. S. 568;
First National Bank v. Anderson, 269 U.
S. 341,
269 U. S. 348;
First National Bank v. Louisiana Tax Commission,
289 U. S. 60,
289 U. S. 65-66;
cf. Hibernia Savings Society v. San Francisco,
200 U. S. 310,
200 U. S.
314-315. The conclusion is even clearer where the
investment may not properly be classified as moneyed capital at
all.**
Two cases,
National Life Insurance Co. v. United
States, 277 U. S. 508, and
Missouri ex rel. Missouri Insurance Co. v. Gehner,
281 U. S. 313,
much relied upon by the appellant, are far beside the mark.
The first of these cases brought up a controversy as to a tax
laid by Congress on the income of a life insurance company. The
company was to be allowed (1) a deduction
Page 296 U. S. 132
for tax exempt securities, and (2) an amount equal to 4% of its
mean reserve fund, diminished, however, by the amount of the first
allowance, the interest on government securities exempt under the
federal law. The court held that the effect of the second allowance
was to cancel the exemption conceded by the first.
The second of the two cases was one where, in the view of a
majority of the court, a tax had been laid directly on the capital
assets of the taxpayer, and so on the government bonds included in
the assets. It was not a case like this where the shares, and not
the capital, were subjected to the burden.
I am unable for these reasons to discover an unlawful
discrimination, though the tax be assessed in accordance with the
statute.
Assuming such a discrimination, I do not understand that any
mandate is laid by this Court upon the Supreme Court of
Pennsylvania as to the choice between two methods of avoiding or
correcting it.
The Acts of 1923, 1927, and 1929 prescribing the deductions were
amendatory statutes, separable, even though invalid, from the acts
thereby amended.
Eberle v. Michigan, 232 U.
S. 700,
232 U. S. 705;
Davis v. Wallace, 257 U. S. 478,
257 U. S.
484-485;
Truax v. Corrigan, 257 U.
S. 312,
257 U. S.
342.
If the state maintains the deductions prescribed by the
amendments, it must remove the discrimination now held to be
unlawful, even at the price of enlarging the deductions.
Iowa-Des Moines Bank v. Bennett, 284 U.
S. 239,
284 U. S. 247.
On the other hand, it may cancel the deductions altogether,
annulling the amendatory acts insofar as they prescribe a new
method of valuation and going back in that respect to the law
previously in force. In that event, the tax to be paid by the
appellant will be increased, instead of lessened. The choice
between these curative measures must be made by the State
court.
Page 296 U. S. 133
For reasons stated in
Bank of California v. Richardson,
248 U. S. 476, 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.
* The following is the text of the statute which defines the
corporations entitled to such relief: "And provided further, That
the provisions of this § 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 byproducts, or
for manufacturing purposes, which is invested in and actually and
exclusively employed in, carrying on laundering, the processing and
curing of meats, their products and byproducts, 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 byproducts, 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 byproducts, 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 byproducts:
Provided further, In case of fire and marine insurance companies,
the tax imposed by this § 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 Pennsylvania."
Purdon's Penn. Statutes, title 72, § 1892.
** For other and less direct analogies,
see Cumberland Coal
Co. v. Board of Revision, 284 U. S. 23,
284 U. S. 28;
Iowa-Des Moines Bank v. Bennett, 284 U. S.
239,
284 U. S. 245;
Rowley v. Chicago & N.W. Ry. Co., 293 U.
S. 102,
293 U. S.
111.