27 A.2d 15 | Pa. | 1942
The question on this appeal is the value of the shares of stock of the Union Trust Company of Pittsburgh for the purpose of taxation for the year 1935 in accordance with the Act of June 13, 1907, P. L. 640, as amended by the Acts of July 11, 1923, P. L. 1071, May 7, 1927, P. L. 853, and May 31, 1933, P. L. 1132. The Department of Revenue found the market value of the capital, surplus and undivided profits of the company to be $123,671,512 and the taxable value of the shares $110,560,929, and fixed the tax at $552,804. On appeal to the Dauphin County Court the taxable value of the shares was reduced to $23,660,919, and the tax to $118,304, There were no disputed appraisements of assets or liabilities, the difference between the results reached by the department and the court being accounted for wholly by a difference in the treatment of so-called "exempt" securities.1 The Dauphin County Court allowed deductions of $13,110,583 for shares of stock of Farmers Deposit National Bank and Mellon National Bank, $2,145,000 for shares of stock of Federal Reserve *300 Bank of Cleveland, $9,031,694 for shares of stock of Farmers Deposit Trust Company, Union Fidelity Title Insurance Company and Union Savings Bank of Pittsburgh, $75,657,567 for United States bonds and notes and other federal securities, and $65,749 for shares of stock of Gimbel Brothers, Inc., and Pennroad Corporation, all of which securities formed part of the invested assets of the Union Trust Company. Only the first item, that of the national bank stocks, had been allowed as a deduction by the Department of Revenue. The Commonwealth appeals from the judgment of the Dauphin County Court, its contention being that the company did not show, as to some of these items, that they represented investments of its capital stock, surplus and undivided profits as distinguished from investments of moneys received by it on deposit, and that therefore no deductions of such items should have been allowed.
Notwithstanding all the litigation which has involved construction of the Act of 1907 and its amendments — four cases in this court2 and two of these in the Supreme Court of the United States3 — confusion evidently persists as to the reason for using a method of apportionment to ascertain the deductions allowable for exempt securities in accordance with the provisions of this tax legislation.
The Act of 1907 provided that the shares of the title companies and trust companies therein referred to should be assessed 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 *301 amount by the number of shares." This act gave rise to no particular difficulty either of interpretation or enforcement, since it required nothing more than an appraisement of the assets and liabilities of the taxpaying corporation. The amending acts, however, of 1923, 1927, and 1933 introduced into the situation the element of exempt securities, the shares being now assessed 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 so much of the amount of capital stock paid in, the surplus, and undivided profits as is not invested in shares of stock of corporations liable to pay to the Commonwealth a tax on shares; or as is not invested in such portion of the capital stock of corporations liable to pay to the Commonwealth a capital stock tax as the capital stock of such corporation employed within this Commonwealth and liable to a capital stock tax bears to the total capital stock of such corporation; or as is not invested in such portion of the capital stock of corporations specifically relieved under the laws of this Commonwealth from the payment of a capital stock tax as the capital stock of such corporation employed within this Commonwealth and relieved from the payment of a capital stock tax bears to the total capital stock of such corporation, — and dividing this amount by the number of shares."4
By this amendatory legislation two problems were created: (1) Must a deduction be made from the tax base for national bank stocks and United States bonds and notes and other federal securities owned by the company? (2) How can it be ascertained which of the securities held by the company are investments of capital stock, surplus and undistributed profits and which are investments of moneys received from depositors? *302
The first of these questions was settled in the twoSchuylkill Trust Company cases —
The second of the questions raised by the amendments of the Act of 1907 is the one with which we are now confronted. Assuming that a trust company has in its portfolio stocks of corporations which are exempt under those amendments, and also federal securities which must be given the same exemption, how is it to be determined whether the investments in such securities are of the capital stock, surplus, and undivided profits or of the deposits? If the permanent investments, such as real estate, mortgages, stocks and bonds as distinguished from short-term loans and commercial paper, are less in amount than the capital stock, surplus and undivided profits, they may safely be assumed to be investments of the company's net assets, since it is more likely that the company would invest its own resources in such securities than that it would so invest deposits payable on demand. A real problem arises, however, when the permanent investments exceed the amount of the capital, surplus and undivided profits, because it then necessarily follows that some unknown portion of the deposits has been invested in such securities. Even in that event it may be possible to prove in some instances that certain securities were in fact investments *303 of capital, surplus or undivided profits, and, if such securities be exempt, they would then be properly deductible from the company's net assets and thereby excluded from the tax base. Thus in the present case the Dauphin County Court found that the evidence definitely established that the stocks of the national banks, Federal Reserve Bank of Cleveland, Farmers Deposit Trust Company, Union Fidelity Title Insurance Company and Union Savings Bank of Pittsburgh were all capital stock investments, and therefore, in computing the tax base, the court deducted them wholly from the capital stock, surplus and undivided profits. The Commonwealth does not now complain of those deductions. There was no such proof, however, in regard to the stock of Gimbel Brothers, Inc., and Pennroad Corporation, which together had a market value of $523,312 (of which $178,227 was liable to tax in Pennsylvania), and United States bonds and notes and other federal securities, which had a market value of $192,865,200, and here a method of apportionment was adopted by the court5 to which the Commonwealth now objects, although it finds no fault with the terms of the apportionment formula if the principle of apportionment is held to be proper.6
What is the theory underlying the use of the apportionment formula? It is an error to suppose, as the Commonwealth apparently does, that a trust company has two distinct funds, one made up of its net assets and the other of moneys received from depositors. The amount of its net assets, constituting its capital, surplus and undivided profits, is a bookkeeping balance obtained by subtracting its liabilities from its gross assets; it is the shareholders' equity in the assets of the *304 company. Ordinarily, investments are made indiscriminately from the company's general or gross assets, and therefore any specific item of securities cannot be allocated as an entirety, in the absence of actual proof justifying such allocation, to either the company's net assets or its investments of deposits. When there is deducted from the gross assets the amount owed to depositors, and the net assets are thereby ascertained, it is only the latter, not the investments of deposited moneys, which constitute the tax base.7 It must therefore be determined how much of the exempt securities remain in the net assets after the deposits (and therefore all investments of the deposits) have been thus deducted from the total assets. In other words, such exempt securities as were investments of deposits having been excluded by the deduction of the deposits, it is necessary to purge the net assets of the remainder of the exempt securities. Since, however, it would ordinarily be impossible for either the Commonwealth or the company to demonstrate what amount of exempt securities has been thus excluded and what amount remains, it is necessary, if the provisions of the taxing statute are to be enforced, to adopt the presumption — normally no doubt corresponding to the fact — that the exempt securities are spread between the net assets and the deposits in the same proportion as all the permanent investments are so spread, it being assumed, for the reason previously mentioned, that where the permanent investments exceed the total of capital, surplus and undivided profits these net assets are wholly invested in the permanent investments and only the excess of the permanent investments represents investments of deposits. The apportionment formula is merely the method by which this presumption is given practical *305 effect. In general, it ascertains the ratio which the net assets bear to the total permanent investments and applies that ratio to the exempt securities.8 It makes it reasonably certain that no exempt securities are included in the tax base, but, on the other hand, does not result in any improper diminution of that base. If the Commonwealth's contention were accepted that the company must affirmatively show which of its holdings were investments of its net assets, none of the deductions required by the taxing statute could be made in most instances, because, as already stated, investments are ordinarily made by the company from all of its funds and not from any segregated portion thereof.
Not only is the apportionment method adopted in this case required in order to implement the statute under which the tax is levied, but it received the sanction of the Department of Revenue itself over a course of years extending from the time of the adoption of the amendments of the Act of 1907 to the year 1934. It has also been approved several times by this court. In Commonwealth v. Hazelwood Savings Trust Co.,
Gimbel Brothers, Inc., and Pennroad Corporation are foreign corporations which are liable to pay to the Commonwealth, not a capital stock tax as such, but a franchise tax under the Act of May 16, 1935, P. L. 184. As the Act of 1907 and its amendments do not provide for an exemption of stocks of corporations liable to pay a franchise tax eo nomine, the Commonwealth argues that no deduction should have been allowed for the stocks of these two corporations. While, inCommonwealth v. Columbia Gas Electric Corp.,
Judgment affirmed.