346 Pa. 406 | Pa. | 1943
Opinion by
This is an appeal from an Order restraining the Defendant City from assessing against the Plaintiff an income tax upon the profits accruing from its operation of certain business properties, as Trustee for individual and sundry trusts.
Section 2(c) of the Philadelphia Income Tax Ordinance, approved December 13, 1939, imposes a tax of one and one-half per centum, subsequently reduced to one per centum, upon “the net profits earned after January 1, 1939, of businesses, professions or other activities conducted by . . . residents.” It is further provided :
“The tax levied under (e) ... herein shall relate to and be imposed on the net profits of any business, profession or enterprise carried on by any person as owner or proprietor, either individually or in association with some other person or persons.”
Pursuant to these provisions, the Receiver of Taxes of Philadelphia, on February 28, 1941, issued certain regulations for purpose of administration, one of which is particularly applicable to the Trustee in this case.
The Defendant City filed an Answer denying the principal averments of the Bill, and the hearing was had before the court below, at which testimony was taken. Thereafter the court issued its final Decree granting the injunction prayed for and dismissed Defendant’s exceptions.
The appeal, therefore, raises two principal questions:
1. Is a corporate trustee, operating real estate as mortgagee in possession or as owner, for the purpose of protecting the assets of the estate pending liquidation and sale, engaged in “a business, enterprise, activity or undertaking conducted for profit” within the meaning of the Philadelphia Income Tax Ordinance?
2. Is the classification of the types of business by the regulation of the Receiver of Taxes a violation of the
The validity of the Philadelphia Income Tax Ordinance is not in question: Dole v. Philadelphia et al., 337 Pa. 375. The only problem presented is whether the particular activities of the Plaintiff Trustee, are taxable under its terms.
It is conceded that the Receiver of Taxes had no authority to go beyond the scope of the ordinance in promulgating regulations. The first question is whether he did so in this case.
The ordinance expressly taxes net profits derived by residents of the City from “businesses, professions, or other activities conducted by such residents.” The ordinance defines “resident” as “an individual, co-partnership, association, or other entity domiciled in the City of Philadelphia.” Plaintiff is a resident within the meaning of the ordinance.
Plaintiff’s principal contention is that it is not engaged in a “business”. As the ordinance itself has defined this word, we shall not quote from case books and Law Digests concerning definitions derived from the use of this word in other writings and statutes. Section 1 defines it as follows:
“An enterprise, activity, profession, or undertaking of any nature conducted for profit, or ordinarily conducted for profit, whether by an individual, co-partnership, association, or any other entity.”
Plaintiff’s argument is based upon the fact that in the instances cited in its Bill the operation of the specific properties involved was undertaken, not voluntarily as a business venture, but because its duties as Trustee required it to operate the buildings to conserve the assets of the trust until such time as the investment could be liquidated. Plaintiff would make the test a matter of motive. The ordinance does not recognize such a distinction. It seems clear that the City meant to tax the net profits of the business conducted by a resident, regard
The court below was unduly impressed by Plaintiff’s status as Trustee. The capacity in which Plaintiff operates these activities is not important. The ordinance taxes all residents conducting business, whether they be corporate, fiduciary, or individual. The ordinance itself defines a “person” as “every natural person, co-partnership, fiduciary (italics ours) or association.” It granted no immunity to trustees as such. Nor is it significant that Plaintiff, in operating these properties, is merely performing its normal duty as a trustee. The question is not whether Plaintiff has breached its duty to the beneficiaries by operating these properties. There is no attempt made by the City to question Plaintiff’s conduct as fiduciary or to impose any surcharge upon it. It is merely asking that it, like any other person conducting similar enterprises, pay the tax which such other person would be obliged to pay on the net profits. Had this Plaintiff Trustee held a mortgage upon (a) a railroad, (b) a theatre, or (c) a hotel, and had been obliged to foreclose the mortgage, take possession, and operate any of such businesses, it could hardly be claimed that the trustee would be relieved from paying the same taxes which any owner would have had to pay while so operating such businesses.
By stipulation the Plaintiff offered six illustrations of the character and method of their operations: (1) a four-story apartment building containing two units of fifty-two apartments each; (2) an office building of five stories and seventeen offices; (3) a loft building of six stories devoted to manufacturing and storage; (4) a two-story apartment house, with one apartment on each
Plaintiff has cited the case of Morrissey v. Commissioner, 296 U. S. 344, for the proposition that it is not conducting a business enterprise because its purpose in operating the properties is conservation and liquidation. Plaintiff has mistaken the significance of that decision. The sole question was whether the trust in that case was a “corporation” within the meaning of the Eevenue Code, in the sense that it was an “association” for the transaction of business. It was held-that it was. Plaintiff refers to the dictum that if a trust acquires and operates business properties merely for liquidation of investments, and not pursuant to the original plan or purpose of the settlor or settlors, it is not taxable as a business association. Obviously this has no bearing
Plaintiff’s contentions that the regulation of the Receiver of Taxes, describing the type of business properties the profits of which are taxable when operated by
Under Section 6 of the ordinance the Receiver is expressly authorized to promulgate “rules and regulations relating to any matter or thing pertaining to the administration and enforcement of the provisions of this ordinance . . The regulation of February 28, 1941, provides that profits derived by trusts from the operation of individual houses, duplex apartments, and apartments of three stories or less “where the trustee operates the same without employing help”, are not taxable, if the properties were obtained by foreclosure or operated by the trustee as mortgagee in possession. Where the properties were acquired otherwise than by foreclosure, certain factors are set forth for determining whether the operation is subject to the income tax on net .profits. One of these factors is the employment of labor. Another class of properties, embracing hotels, apartment hotels, loft buildings, office buildings, and apartment houses of three or more stories, is created, the operation of which is subject, to the tax.
The classification recognized by the regulation is obviously intended to distinguish between properties commonly known as business properties and those commonly designated as homes or residences, including small apartment houses where the employment of no staff is required. As the Superior Court pointed out in Ross v. Philadelphia et al., supra, the ordinance contemplates a tax only upon “earned income”. This implies that some labor, management or supervision must be involved in the production of that income. Income derived merely from the ownership of property would not satisfy the definition. It is therefore important to determine in the case of any property producing income to a trust estate whether the trustee, through agents or servants, is actively managing and supervising the operation of the property. The ordinance defined “business” as an “enter
Plaintiff objects, however, that the Receiver has included among the class of taxpayers, mortgagees in possession, who, it asserts, are not “owners” or “proprietors” as these words are used in the ordinance. The word “proprietor” is defined in Webster’s New International Dictionary as: “an owner; sometimes, especially in statutory construction, in a wider sense, a person having an interest less than an absolute and exclusive right, as the usufruct, or present control and use, of property.” That City Council intended to use the word “proprietor” in the wider sense is apparent from the fact that the word appears in the ordinance with, and in contrast to, the word “owner”. It cannot be assumed that the expression “owner or proprietor” is merely tautological, where the words employed have distinctive connotations. A mortgagee in possession is so clearly a “proprietor” in this sense, that it is unnecessary to point out that in this State the mortgagor conveys title to the mortgaged premises to the mortgagee, retaining an equity of redemption, and that, upon taking possession on default, the mortgagee exercises many of an absolute owner’s prerogatives.
The regulation was therefore validly promulgated by the Receiver within the scope of the ordinance. As it represents a bona fide and reasonable attempt to make an administrative classification of operations as taxable and nontaxable, depending upon whether the taxpayer is engaged in performing services and actively managing property in the conduct of business thereon, or whether he is merely receiving unearned income from
In National Transit Company et al. v. Boardman, 328 Pa. 450, at page 456, Mr. Justice Linn said: “The reasonableness of classification is for the legislature in the first instance; unless-there is no rational basis for it, the court will not interfere.” Here it cannot be successfully contended that the regulation made for administrative purposes is unreasonable on its face. Its application to the situations cited by Plaintiff as illustrative cases shows that it is not unreasonable in operation. As Mr. Justice Linn said, however, at page 457: “Classification is not necessarily invalid because borderline cases may present situations which, if they stood alone, might constitute argument against the adopted classification.” See also Turco Paint & Varnish Company v. Kalodner et al., 320 Pa. 421; Dole v. Philadelphia, supra.
Plaintiff urges that it is unconstitutional to make regulations for trustees as a class, as opposed to individuals. The ordinance makes no such distinction. There is nothing in the record to indicate that the same considerations applicable to the operation of these types of property by trustees under the regulation, would not also be applied to individuals in similar circumstances.
Plaintiff’s final objection is that the regulation violates the “rule against double taxation” because it would be obliged to pay the income tax upon net profits derived as mortgagee in possession of business properties while subject at the same time to personal property taxes on the mortgages, or to the corporate loans tax in
The final decree of the court below is reversed; the injunction is dissolved; and the bill is dismissed. Costs to be paid by Appellee.