H- J- ^vV ?^ fc>v.f<^ U^ ^< '*MM V^^' i» *• >i:4':%^- C^.^/?^^)^ 678-3 3 1924 032 432 522 olin Cornell University Library The original of tliis book is in tine Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924032432522 «K: Hie Development of Corporation Taxation in the State of New York Si'!** <■ A THESIS Presented to the Faculty of the Graduate School of Cornell University for the Degree of DOCTOR OF PHILOSOPHY PRESS OF THE CALLIHAN & STOTTUEMIRE CO. CAMBRIDSE, OHIO INTRODUCTORY NOTE The purpose of this study is to trace in outhne the development of the system of taxing corporations in the state of New York. Some consideraion is also given to problems which have arisen under the present tax laws. Special emphasis has been put upon the legislative history of corporation taxes and upon the judicial interpretation of the stautes enacted. From among the great mass of statutes and court decisions bearing upon the subject I have tried to select tlie more important, and to discuss them in such a way as to show the general lines along which the tax system has developed. I have also tried to show, where possible, the more important influences which weighed with courts and legislature. The conclu- which have been drawn from laws, cases, and reports cited in the text are, in general, bolstered up by many which are not cited. In the preparation of the study, I have been materially assist-ed by professor Allyn A. Young of Cornell Univer- sity, under whose direction the work was done. Pro- fessor T. S. Adams of Yale University, Prof. C. O. Rug- gles of Ohio State University, and Professor J. R. Turner of New York University have also given valuable sug- gestions. The services of others, who have assisted by reading the manuscript and proof, I wish also to acknow- ledge. M. H. HUNTER Urbana, III, September, 1917. TABLE OF CONTENTS CHAPTER I The General Taxation of Corporations Before 1880— Page 1 Personal property tax developed early in the Colonial history- Early charters to turnpike companies contained regulatory provis- ions — The law of 1823 was the first to specifically tax corporations — By laws of 1827-28 a corporation in receipt of no profit was not taxable — Many commutation provisions are found in the early laws — After much litigation the legal nature of a corporation was es- tablished — ^The meaning of "net income" caused much litigation — Changes were made in taxing corporations in 1853 — Classification was soon introduced — 'Under the commutations allowed much fraud was practiced — Much litigation was caused by the law of 1853 — Many inequalities resulted from the assessments — Officials pro- posed remedies but without immediate results — Legislature aroused to action in 1879 — Law modified in 1880. CHAPTER II The General Taxation of Corporations — Page 21 The law of 1880 is the basis of the annual franchise tax — By law of 1880 corporations were classified according to dividends paid — Not all corporations were included in the law — Defined as a tax on franchise in 1881 — Action of the legislature was criticised by the press — The changes of 1880 were received favorably by State officials yet other reforms were advocated — State Assessors give new ideas concerning corporate taxation — Low tax rate attributed to corporation taxes — Litigation which arose firmly established the law — Injustice to foreign corporations removed by taxing only the part of the capital employed in the state — Tax system condemned because of the unjust burden upon real estate — Question of taxing indebtedness was much discussed — Organization tax was adopted in 1886 — Organization tax modified by the courts and the legisla- ture — Some corporations evaded full share of taxes — Courts were often called upon to interpret the laws — The law of 1880 as amend- ed in 1896 and 1906 constitutes the present annual franchise tax — Some corporations are exempt from the annual franchise tax. Courts have not always been consistent in deciding questions aris- ing under the law. CHAPTER III. Problems and Difficulties of the General Tax on Corporations. — Page 39. The law of 1880, by introducing indirect taxation, attempted to eliminate the evils that existed under direct taxes — System suc- cessful from standpoint of revenue and cost of collection — Diffi- culty exists in determining the value of capital stocks-Complexity of the law is a disadvantage — In some cases heavy burden falls on real estate — Methods employed for dealing with delinquent cor- porations not satisfactory — System has been criticised because the same burdens have not been placed upon corporations and individuals — The assessment of corporate property for local purposes presents many difficulties — The valuation of real estate constitutes a special problem — Method prescribed for assessing capital stock for local purposes too complex to be used — Tax officials and organizations have asked for modifications — Organization tax opposed because it "drives capital from the state" — Separation of state and local reve- nues not wise — Bill introduced in 1881 proposed a stock transfer tax — Stock transfer tax adopted in 1905— JT ax on transfers of stock not class legislation — Evasions have been checked but not elim- inated by changes in the stock transfer tax law — Any increase in rate should be left to meet emergency. CHAPTER IV The Taxation of Foreign Corporations. — Page 57 Treatment of foreign corporations has varied widely — First laws affecting foreign corporations applied only to insurance com- panies — Law of 1851 was favorable to foreign capital — Courts inter- preted the early law at many points — Retaliatory insurance in- troduced in 1865 — Foreign corporations evaded the tax bj' estab- lishing agencies in the state — Foreign manufacturing concerns to a great extent escaped taxation — Legislature modified the law in 1880 — Corporations sought to defeat the new legislation and much litigation resulted — The law proved practically a dead letter — Sys- tem of taxing foreign bankers modified in 1894 — License tax im- posed in 1895 — Foreign insurance taxation modified in 1892 — Or- ganization or license tax was productive — Modifications in the laws caused litigation — Much foreign capital escapes which the law in- tends to tax — Go\ernor and State officials asked for modifications — Law of 1896 basis of present tax on foreign corporations — ^Two conflicting policies have been followed in dealing with foreign cor- porations — Equality of tax burden should be secured as between foreign and domestic corporations — Same basis should be used for both domestic and foreign corporations. CHAPTER V Tax.\tion (IK Insurance Companies and Manufacturing Corporations. — Page 11 Domestic insurance companies first taxed under the general tax laws — Rise of mutual companies created a new problem — Opin- ion advanced in 1879 that insurance required distinct treatment — Tax officials asked for modifications and the legislature responded in 1880 — Tax did not prove productive — The determination of the surplus of insurance companies proved difficult — Variance of opin- ion as to what extent life insurance companies should be taxed — From the nature of insurance companies they should fit in with the general tax system — Tax on gross premiums most used — Tax on gross premiums open to valid objections — Systems used do not meet the theoritical and practical tests of justice — Policy of en- couraging manufacturing interests has been followed — More len- iency than has been shown has been advocated — Law of 1880 made concessions to manufacturing companies — Manufacturing capital is assessed locally for local purposes — Manufacturing companies should bear their share of the public burden — Problem is that of taxing capital in general. CHAPTER VI. Taxation of Banks. — Page 94 Bank stock taxed under the first law taxing corporations — Complaints were taken directly to the legislature — Banks consid- ered corporations — Bank surplus taxed under the law of 1853 — Most radical change in bank taxation came in 186S — Difficulty arose from taxing capital invested in United States securities — Law of 1865 declared unconstitutional — Debts could not be deducted from assessments — Decisions of the courts were unexpected — State offi- cials condemned the inequalities in bank assessments — Assessment in conformit}' to the law would have caused inequality — Bank capi- tal was reduced — Bill for the relief of banks defeated in the as- sembly in 1887 — State officials criticise the severe bank taxation — The dissatisfaction was not merely a clamor stirred up by the banking interests — In 1878 court held that debts must be deducted from assessments — "Moneyed capital in the hands of individuals" defined by the court — Law changed in 1901. Recent complaints have come from interests located without the state — Present system of taxing banks considered satisfactory — Banks should not be taxed so much as to hinder capital seeking that form of investment — The taxation of bank deposits a much discussed question — ^The taxation of savings banks has had a separate hstory — Dfficulty has arisen in determining the value of the surplus — The taxation of deposits in saving banks has been much discussed — Small tax on deposits would work but little hardship — Trust companies have been treated differently from other banks. CHAPTER VII. Taxation of Railroads and Other Public Service Corporations. — Page 122 For many years public utility companies were taxed under the general tax law — Favoritism shown to state projects — Difficulties arose in assessin.g the property of railroads — Railroads removed from the scope of the general tax system in 1857 — General property tax used — Special Tax Commission condemned the system in 1871 — Telegraph companies were assessed only on their personal prop- erty — The taxation of public utilities was generally criticized — Courts differed in the methods prescribed for assessing real estate — System for taxing transportation companies changed in 1882 — This system, as modified in 1896, is practically the present system — Much litigation has arisen but mostly in connection with local as- sessments — Courts alternated between cost of reproduction and earning power in formulating rules for valuation — Taxation for local purposes still the cause of much complaint — ^Gross earnings tax partially used in New York and has advantages— Ontario Tax Commission upheld the gross earnings tax for railroads — Some state tax commissions advocate the gross earnings tax— Gross earn- ings tax has serious difficulties and some states have given it up — A tax on net earnings has been advocated by some authorities — The net earnings tax has serious difficulties — The ad valorem method depends on the competency of the board — Some form of unit taxation would prove more satisfactory than the system now in use in New York. CHAPTER VIII. The Special Taxation of Public Service Corporations. — Page 151 Governor Roosevelt primarily responsible for the special fran- chise tax — The bill as first passed was defective yet the governor refused to veto it but called a special session of the legislature to amend it — The special session was unpopular with the legislators and the public — Special franchises are assessed as real estate — The press was generally favorable to franchise taxation — Special franchises are taxed as real estate to get around difficulties in the general tax law — The assessment and valuation of the special fran- chise has proved particularly difficult — Counsel designated by the Attorney General prescribed a method for valuation — Board of Tax Commissioners at first met with many difficulties and were criticised — All special franchises of less than 250 feet in length were removed from the action of the law but later those in incorporated villages were added — The Tax Commissioners approved the law as a matter of justice — ^The statute has caused an enormous amoimt of litiga- tion — Corporations were criticised for contesting the law — Tax Commissioners were given the power in 1911 to equalize special franchise assessments with other assessments. Statute has proved to be one of the most arbitrary and complicated parts of New York's tax system — Many difficult questions arise in applying the law — Companies were exploiting the public through the franchise and no weapon seemed so readily available as taxation — Regula- tion by a public service commission is a method more recently used to secure justice — Public utility property should be taxed to the same extent as other property. Should have some system of unit taxation assessed by a central board. CHAPTER IX. Summary of New York Laws Taxing Corporations. — Page 169, CHAPTER I THE GENERAL TAXATION OF CORPORA- TIONS BEEORE 1880. i)Evi:l()pment of general property tax It will be profitable to sketch briefly the general system of taxation in New York before a special tax was im- posed upon corporations. We find that the personal prop- erty tax developed almost with the beginning of the col- ony.^ Under the Dutch rule Peter Stuyvesant, as early as 1654, succeeded in having an "honest and fair tax" placed upon "land, houses or lots and milch cows or draft oxen." The tax was more highly developed on Long Island than elsewhere. During the English occupancy of the colony, 1664- 1674, the Duke of York enforced a prop- erty tax upon Long Island, and when the Dutch regained ascendency funds were secured by taxing the wealthiest citizens. This class included all who possessed more than two hundred dollars. The results of these uns3'Stematic attempts were only partially successful. After the establishment of the colon- ial assembly in 1683, the general property tax was de- veloped in a more uniform way. The principle of assess- ing every person in proportion to his aggregate property was the fundamental rule. In the "tax and assessment" law of 1683 — the first of its kind^provision was made ' For an excellent general history of these matters, see J. C. Schwab, "History of the New York Property Tax," Publications of American Economic Association, Vol. V. 2 DEVELOPMENT OF CORPORATION TAXATION^ STATE Ol- NEW YORK for the election of assessors, the assessment of property, and the election of a treasurer. The method for disburs- ing the money raised was also included. Two of the dif- ficulties of the general property tax soon appeared — dis- honesty of officials, and incorrect and partial assessment of property. In less than ten years after the passage of the act the assembly appealed to the governor for some method of equalizing assessments. The interference of higher authorities, and the establishment of flat rates of assessment for different classes of property were used to improve matters. Fundamentally, however, the law re- mained the same throughout the eighteenth century, al- though various amendments indicate that the operation of the law was not thoroughly successful. The property tax in New York was from the first couched in general terms, and hence was in principle a true "general property tax." In most of the other col- onies certain specific objects of taxation were defined, and the value regulated by law.- Where land was taxed it was divided into different grades, and so were horses, cattle, etc. The necessity of holding land before being admitted to the full rights of citizenship, and the provision of the federal constitution forbidding states to levy export or import duties, were conditions which helped to tighten the grip of the general property tax. This tax became so thoroughly intrenched that when any new object of taxa- tion appeared, it was inevitable that an attempt should be made to put it under the property tax. When the cor- porate form of organization began to become important, the problem of taxation naturally appeared to be one of merely extenrling the application of the general property tax. LiARLY TREATMENT OF CORPORATIONS Before any general law relating to the taxation of corporations was enacted, there were a number of import- ant developments in the policy of the state towards this problem. Turnpike and bridge companies formed by far " In Rhode Island, Delaware and Maryland, as well as in New York, the general property tax was in force. DEVELOPMENT OF GENERAL PROPERTY TAX 3 the largest proportion of earljr business corporations. Most of the laws granting charters to such companies contained regularatory provisions, which, while not im- posing taxes, required certain payments from the com- panies.^ Before ieen less than six per cent and (a) assets do not exceed liabilities, exclusive of capital stock, or (b) the average selling price of the stock during the year has been below par, or (c) if no dividend was declared, then the rate of tax is three fourths of a mill. (3) If dividends have been less than six per cent and (a) assets exceed liabilities, exclusive of capital stock, by an amount equal to or greater than the par value of the stock or (b) if the average selling price of the stock has been above par, the tax rate is one and one-half mills, but the valuation of the stock shall not be less than (a) par value; (b) difference "New York Statutes, 1889, Chap. 463 gives the Comptroller power to make refunds. " New York Statutes, 1896, Chap. 908. " New York Statutes, 1906, Chap. 474. THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 35 between assets and liabilities, exclusive of capital stock; (c) average selling price of the stock during the year. (4) If a part of the capital stock has paid more than six per cent dividend vi^hile a part has paid no dividend or less, the above rules are to be applied to each portion of the stock as if it existed alone. (5) Corporations not assessable by the above rules are to be taxed by an amount not less than would be produced by an assessment of (a) one and one-half mills on the actual value of the capital stock, or (b) one and one-half mills on the average sell- ing price during the year. A number of corporations, however, are exempt from the annual franchise tax on capital stock. These are banks, savings banks, insurance companies, trust com- panies, manufacturing and laundering companies, (to the extent of capital actually employed in the state in manu- facturing and selling products ef such manufacturing,) mining companies wholly engaged in mining within the state, agricultural and horitcultural associations. Com- panies owning or operating elevated railroads or surface roads not operated by steam, and companies formed for supplying water or gas, for electric or steam heating, lighting or power purposes are also exempt from the tax. To secure exemption, laundering, manufacturing, and mining companies must have at least forty per cent of their capital stock invested in property within the state, and used for laundering, manufacturing, or mining pur- poses.*^ From the tone of these provisions we may infer that there has been a change in the general attitude towards corporations. While once they had been favored and en- couraged by special exemptions, and lax administrative laws, they were now viewed as the owners of special priv- ileges, properly liable to taxation. Some small tendency appears, too, to depart from the principle of the general property tax, although it remains in large measure the basis of the system. In general, it is clear that, in these "The provisions for taxing corporations exempt from the annual franchise tax on capital stock are discussed in the chapters dealing with such corporations. 36 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK laws, corporations were to be dealt with more stringently than individuals. The law, as given above, left many points for judicial interpretation. The question as to what "capital stock" means, and how it shall be used in applying the law has often arisen. The answers of the courts have not always been consistent. The Court of Appeals defined it as mean- ing not the share stock held by individuals, but the actual capital which this represented.*^ As the basis for the franchise tax it was the equivalent of the term "capital", and was the amount of capital so employed upon which the tax was to be computed. It further held that bonds, whether United States bonds or not, in the absence of proof that they were bought with a corporation's surplus, should be treated as capital employed in the state, and as a part of the basis upon which the franchise tax should be computed. Holdings in other corporations were to be treated in like manner. Where no dividends were paid or where they were less than six per cent, the actual and not the par value of the capital stock employed within the state was held to be the proper basis for computing the franchise tax. Where there had been no dividends or sales of stock, the value was to be determined by taking the value of the assets after deducting liabilities and adding to the sum then re- maining the value of the good will of the business, in- cluding its right to conduct business under a franchise. ■** The tax was to be based upon capital activity employed in its corporate business, and not upon the passive hold- ing of it in unproductive land. A corporation whose entire capital stock was issued in payment for an island consist- ing of unimproved swamp land was not taxable on its capital stock. *^ In case no dividend has been declared. " Commercial Cable Company vs Morgan, 178 N. Y., 433. "People vs Roberts, 154 N. Y., 101. " Niagara River Hydraulic Company vs Roberts, 30 Supreme Court, Appellate Division, 180. The Court of Appeals later held (198 N. Y., 250) that the law did not mean that capital stock should be employed in business to render it taxable. If the stock was rep- resented by real estate it must be deemed to have been "employed" within the meaning of that expression of the law. THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 37 the Comptroller may estimate the value of the capital stock at the average price for which the stock has sold during the year although such price may exceed the par value of the stock and thus indirectly tax the surplus.*® The average amount of capital employed during the year, and not the amount in use at any one time must be taken as the basis for the tax.*'' The state had the power to impose a franchise tax, even if substantially all the property appraised was ex- empt by United States statute.^*' The imposition of the franchise tax computed upon dividends was not a tax up- on property, and did not violate the restriction of the fed- eral constitution prohibiting states from interfering with imports from other states or foreign countries.*^ The part of the capital stock of a New York corporation rep- resented by merchandise temporarily in the hands of sell- ing agents outside the state, which is^ijot sold but is brought back into the state, is taxable.^" The increase of exemptions from the annual franchise tax led to the testing of the constitutionality of the law in respect to the principle of uniformity. The Court of Appeals held that by merely exacting a payment for the privilege of exercising corporate powers, the state did not impose a property tax. The legislature, it held, is not bound to impose the same conditions upon all corpor- ations for the privilege of doing business in New York. It may grant or withhold the privilege in the case of each corporation as it sees fit, and the rules relating to the taxation of property do not apply.^^ These laws constitute the method for assessing the an- nual franchise tax. The basis for the tax is capital stock while the rate is determined by a number of variable fac- tors — dividends, market price of stock, and financial con- " Colonial Trust Company vs Morgan, 162 N. Y., 654. "Brooklyn Rapid Transit Company vs Morgan, 57 Supreme Court, Appellate Division, 335. *» U. S. A. P. P. Company vs Knight, 174 N. Y., 475. "Matheson vs Roberts, 158 N. Y., 162. "Fanners' Loan and Trust Company vs Wells, 180 N, Y., 16 " Vanderwori Company vs Glynn, 194 N. Y., 387. 38 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK dition of the corporation. The payment of this tax re- lieves the capital stock from any other tax for state pur- poses. It is, however, assessed locally for local purposes. It seems an attempt has been made to consider the profit- ableness of a company in determining the tax since classi- fications are based upon dividends. Some of the diffi- culties which have arisen under the law of t88o, as amended, we shall consider the next chapter. CHAPTER III. PROBLEMS AND DIFFICULTIES OF GENERAL TAX ON CORPORATIONS Since 1880 corporations, except those exempt by law, have borne the annual franchise tax upon their capi- tal stock. This method is an improvement over the one previously used and has not been void of good results. The direct system of raising taxes for state purposes has been superseded, to a great extent, by the indirect system. In earlier years the direct tax was easily levied, was simple, and largely satisfactory in operation. The few towns and small amount of personal property went hand in hand with a government of trivial expenses. As industrial or- ganization became more complex the tax laws failed to properly classify property and property owners, and in- justice resulted. Personal property evaded assessment vvhile real property bore a disproportionate burden of the tax. The amount of personal property increased rapidly yet the amount found on the assessment rolls actually de- creased from year to year. Not only was little personalty reached, but the valuation of realty in the different dis- tricts was so haphazard, either by accident or design, that it became necessary to establish equalizing tribunals. Equalizing, under the circumstances, could not be ade- quate and much injustice remained. The annual franchise tax attempts to remedy the evils which had grown up. Personal property, undoubtedly, is made to bear more of its legitimate burden while the lack of uniformity through local assessments has been eliminated. The evasion which arose under the require- ment that personal property be assessed at the place of the principal office has likewise been stopped. From the standpoint of revenue and expense of collec- 39 40 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK tion the tax is in a large measure satisfactory. While ' not as much is' received from this source as in some other states, it forms an important part of the income of the state.' From 1900 to 1902 there was an increase of 200 per cent in the number of corporations taxed which of course greatly increased the revenue.- The expense of collection and administration has been less than one per cent., and the number of corporations paying the tax in 1903 was more than 7500. There are now more than 40,000 corporations paying the tax. Many difficulties and problems, however, still present themselves. One which has always existed and which still proves troublesome is in the determination of the value of capital stock. The Attorney General, in his re- port for 1898,^ quotes the language of the court in the Union Trust Company vs Coleman, (126 N. Y., 443), that "capital stock is not the share stock but the company's capital and surplus which should be assessed at its actual value when that is known or can be ascertained." A dis- tinction was drawn between the capital stock of a com- pany and that of the shareholder. That of a company, it held, is simply its propert}^ existing in money or prop- erty or both, while that of the shareholder is representa- tive, not merely of the existing and tangible capital, but also of surplus, dividend earning power, franchise, and goodwill of an established business. The capital stock of a company is owned and held by the company in its cor- porate character ; that of the shareholders is owned and held by them in different proportions as individuals. The one belongs to the corporation, the other to the corpora- tors. The actual value of the capital may be widely dif- ferent from the share value although the par value always corresponds to it. The law intended to deal with the com- ' The income from this source is between three and four million dollars. It is almost one-third of the amount received from all forms of corporation taxes. 'This increase can largely be attributed to the legislation in 1901, affecting the status of foreign corporations. ' Report of the Attorney General, 1898, Senate Documents, Vol. 1, No. 9. PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 41 pany's capital, not with the share stock which it does not own. If this opinion were to be strictly followed the share stock would have nothing to do with the subject of valua- tion. Only the capital and surplus of the corporation, as- sessed at its own value without regard to the selling value of its shares, could be considered. The distinction which the court draws is, of course, sound, but the value of the one thing is often reflected in the value of the other. If a company has a large amount of surplus from which dividends are being paid, the share stock will be more valuable. On the other hand, the value of a company's capital is not always shown by the share value. If a com- pany put its earnings into betterment it maj' cause a small dividend which in turn will be reflected in a low selling value of the share. Where the value of the capital stock is difficult to ascertain the value of the share might well be considered as one of the determining factors. The courts have not consistently held to this opinion but have deviated so frequently that it would be impos- sible to follow their rulings in assessing the capital stock. They have proposed one method where the dividend de- clared is above six per cent, another where it is below, and still a third for foreign corporations. There can be no good reason for different methods of valuation in these cases. Should it be considered desirable, as the court procedure would indicate, that different classes of cor- porations should not be taxed uniformly, the result should be secured through the rate of tax and not through differ- ent methods of valuation. The legislative exemption of secured bonds* from taxa- tion gives corporations a chance to evade all or part of the annual franchise tax. Often stock is issued as a bonus and the only real value received into the treasury is from the sale of bonds. Such corporations exercise exactly the 'The secured debts tax law was passed in 1911 (Chap. 802). By its provision any bond secured by mortgage on real property, by a deed of trust or real or personal property, or by the deposit of se- curities as collateral is exempt from payment of taxes after a tax of one-half of one per cent has been paid and stamps have been affixed indicating the payment. 42 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK same franchise privileges as if their stock had been issued for actual property. When the bonded indebtedness is considered a liability and deducted from assets in determ- ining the amount of capital stock, often there is little left upon which to levy a tax. The franchise of such com- panies are just as valuable as if all the assets were rep- resented by shares of stock, yet the existence of bonds makes the capital stock of little value for tax purposes. Not only do bonds contribute to the evasion of the tax, but the very fact that they are issued influences the classi- cation of a corporation for the purpose of taxation. Bond issues keep down dividend rates, which, according to the law, are the basis upon which classification is to be made. Tn cases where the tax is based upon the average market value of the stock a heavy bond issue might materially reduce the assessment. It is generally believed that the corporate form gives advantages for which the corporation should pay. If the capital stock, through the annual franchise tax, be taken as the basis for this payment, the system should be clarified and simplified. The confusion arising from court decisions between capital stock and capital as basis for the tax should be cleared up. Capital stock is general- ly taken to mean the share value, the actual value of which, depending upon a variety of causes, may change from day to day. This in itself would be an inefficient basis, but might well be used as a factor in determining the value of capital. By capital we generally mean the definite tangible or intangible assets with which a corporation may do busi- ness. Under this would come personal and real property, such as cash, accounts receivable, merchandise, and all items such as trade marks, good will, etc., which enable a companyto carryout thdse purposes forwhich itwas form- ed. Since such items are nnt always accurately reflected in the share value the capital would form a much better basis for the tax. The rules for classification, however, should be simplified and the duties of the comptroller lightened. The application of the present system to some forty thousand corporations involves an enormous PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 43 amount of clerical work, and renders it difficult to detect inaccuracies. The complexity of the law is a disadvantage. In 1893 the legislative committee investigated the matter of taxation. This inquiry showed that the complexity of the law — and subsequent amendments have made it still more complex — had caused many corporations to leave the state. The witnesses before the committee contended for the simplification of the laws so that corporations could know what to pay and what might be collected. The law has not been constructed on a scientific basis but has been made piece meal by different legislatures. Mr. George F. Seward said : "It is hardly conceivable, yet true, that one cannot find by study of the statutes, any indication that the work of any of these commissions which have been apopinted during the last forty years, or all of them together, have made any impression upon the legislature."^ The use of these complex measures for taxing corporations instead of adopting some care- fully worked out system has resulted in seriously burden- ing some while others have practically escaped taxation. Governor Dix is his message of July 12, 191 1® vigor- ously attacked the complexity of the law : Section 183, under which corporations are taxed for the priv- ilege of doing business in a corporate capacity, has been a con- stant source of litigation. It is so complicated that no ordinary business man can understand its provisions and even the Court of Appeals has complained that the legislature seems to have tried to express a very simple idea in very complicated language. Yet over forty thousand business corporations are assessed an- nually under this statute and are compelled to make reports in regard to which their officers are in hopeless confusion and even their attorneys are frequently bewildered in their efforts to com- ply with its provisions. The law is difficult to interpret and as a result of its vagueness and complexity millions of dollars are levied with no certain rule. The assessment, moreover, is left to one official with no possibility of proper check or sup- ervision. The public can generally neither know the basis of taxation nor whether the amounts collected are proper or not. "National Conference on Taxation, Buffalo, 1901. p. 116. 'Public Papers of Governor Dix, 1911, p. 73. 44 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK The complexity of the situation has discouraged rath- er than encouraged the collection of the tax. Courts have been busy determining which provisions of the law applied to different companies. In one case at least they removed from the list one whole class of property that had hither- to paid the tax.'' The decision held that a company or- ganized for the purpose of purchasing and holding real estate was not employing its capital in doing business in the state. In this particular case the amount invested was $150,000. Soon after the investment the property was .'jold for $750,000 which would indicate that the company had employed its capital in a fairly satisfactory business transaction. In one year the decision caused 541 cor- porations to be removed from the tax roll. This is but an example of situations arising because of lack of clear- ness. Here capital was "invested" and not "employed" — hence the law did not apply. The Comptroller suggested that if capital could be "invested" without being "employ- ed" it was time to so word the statute that capital employ- ed, invesed or held in the state would come under the law. While this class of capital escaped entirely others have been unduly burdened, and it was generally believed that large sums of New York capital sought incorporation in other states. Governor Odell, in his message of 1901* l)ointed out that corporations were treated more liberally in other states than in New York. This forced the capi- tal to other states and New York lost the revenue which they enjoyed at her expense. He pointed out that dur- ing the previous year only $340,000,000 was organized under New York laws while single corporations with a greater capitalization than this had been organized in other states. This chaotic and complicated tax law can be account- ed for because of the way by which it came into exist- ence. The demands for revenue increased more than eight times as fast as the population. As these new de- mands for revenue arose a new tax was imposed to meet ' Annual Report of New York State Comptroller, 1900, p. xix. 'Governor Odell's Message, 1901. Assembly Documents, 1901, Vol. 1. No. 2. PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 45 the need and finally became imbedded as a part of the regular system. That legislators allow such a system to continue is not because they have never had their atten- tion called to conditions. Practically every official and organization connected with tax administration or inter- ested in tax reform has pointed out the difficulties and asked for remedies. The State Comptroller in his report for 1899 said: "It is unfortunate, both as regards the tax payer and the subject of taxation that many cases arise where the determination of the courts must be had, and where often times the tax assessed and collected is inequitable and, aside from the letter of the statute law, has no justification. n."'' The opinions expressed in prac- tically every other Comptroller's report have been simi- lar, always decrying the complications and asking for simplicity and justice. The newspapers have repeatedly laid bare difficulties and criticized those responsible for not giving relief. A number of special tax commissions have been appointed to investigate the system which generally reported the cumbersomeness of the law. The Commis- sioners of Taxes and Assessments for New York city have been active in advocating reform while the New York Tax Reform Association has repeatedly drawn up laws and amendments, and attempted in almost every con- ceivable way to get some change. A number of loop holes exist through which evasions are possible, and which cause more inequality and in- justice than should exist. Since the courts have held that the taxes are a payment for past benefits and not for future privileges, a number of corporations, especially foreign, moved out of the jurisdiction of the state just before being assessed. The amount of revenue lost by such practices is considerable. The use of the amount of capital "employed in doing business in this state" as a basis for the tax allows much capital to escape taxation. This is especially true of foreign corporations and will be discussed in Chapter IV. Corporations which pay the annual franchise tax are 'Annual Report New York State Comptroller, Assembly Docu- ments, 1899, Vol. 1, No. 3. 46 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK exempt locally from all taxation upon personal property for state purposes. Since the real estate is not exempt, injustice is borne by the corporation with a comparative- ly large amount of real estate. The State Comptroller in his report for 1900/" said that a company doing manufac- turing business pretty generally took advantage of the provision. For example, he said, a company may em- ploy one or two thousand dollars in handling goods of other makers and pay a tax of a few dollars. By doing this it secures exemption from local taxation on personal property for state purposes when it may have several thousand dollars which would otherwise be subject to such tax. This again discriminates unjustly against the holder of a large amount of real estate. Stock-watering has also been extensixely practiced. This keeps the rate of dividend low, and puts the corporation in a class with lower taxation even though the return upon the actual investment may be high. The methods employed for dealing with delinquent companies have not been entirely satisfactory. The pro- cedure is for the Comptroller to issue a warrant to the county sheriff, ordering him to sell the property of the company in order to satisfy the tax claims. It is difficult, however, for the sheriff to sell such intangible property a.'' good will, services, etc. Neither have sheriffs appear- ed to be over-zealous in attempting to find property upon which to levy a tax claim. WHien it is found, moreover, it is often so heavily encumbered that under a sheriff's sale there would be little equity left to the state to satisfy taxes and cost of collection. An attempt has been made to deal with delinquents through annulling their char- ters. If a tax account remains unpaid for a year and the Comptroller is satisfied that the delay is intentional, he notifies the Attorney-General to bring action to annul the charter. The method of dealing with other forms of delinquen- cy, such as failures to file a report, is also inadequate, ex- pensive, and time consuming. Action must be by the Attorney-General at the instance of the Comptroller. In " Annual Report of the New York State Comptroller, 1900, p. xxi. PROBLEMS AND DIFFICOLTlESj GENERAL TAX ON CORPORATIONS 47 many cases enforcement is practically impossible. This system may have been fairly efficient when it was inaugu- rated for then there were only some two thou- sand corporations on the taxing list, but there are now more than forty thousand demanding the attention of the bureau. More than five per cent of these, moreover, are delinqunt in some way every year. To expect the Attorney-General annually to commence proceedings in over eight hundred cases is unreasonable. Annulment of the charter' by the Comptroller in cases of intentional de- linquency would perhaps be an adequate remedy. This would have the incidental advantage of doing away with a number of corporations which exist only on paper. The taxation system has been severely criticized be- cause it does not place the same burden upon individuals as is placed upon corporations. By individuals is meant the large business organizations in the form of partnerships. The regulations applicable to corporations do not apply to individuals. Corporations are subject to special kinds of taxation which individuals escape. Many examples exist where corporations are burdened much more heavily than other companies doing practically the same kind of business. The manner of assessment is entirely differ- ent. Corporations must prepare technical and compli- cated reports which make the advice of an attorney neces- sary while the individual, taxed only locally, is assessed before the local assessor. Individuals may deduct all personal debts while no such deductions are allowed to corporations. Granting these discrepancies, we cannot conclude, however, that all business organizations should be taxed on the same basis. In so far as the corporate charter grants advantages and privileges there is no rea- son why they should not be compensated for in the form of taxes. If the price asked be too high there is nothing to compel new business enterprises to take on the corpor- ate rather than the partnership form. A heavy tax on corporations, however, may prove to be an unjust burden to those already in existence. For many corporations it would be next to impossible to change to a partnership organization. Since corporations have proved particu- 48 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK larly efficient in the development of industry and there- fore socially desirable, taxes should not be so oppressive as to discourage this form of organization. These are some of the difficulties connected with tax- ing coi-porations for state purposes. The assessments of corporate property, both real estate and capital stock,^' for local purposes likewise presents difficulties. Although statistics for local taxes are not available, there is no doubt that the aggregate is much larger than the taxes paid for state purposes. The assessments are made by local officials under practically the personal property tax system. Here the evils of the system are enhanced by the complexity and magnitude of the assessments. Real estate is assessed at its situs while the capital stock is assessed at the place of the principal office. Since corpo- tions may choose the place for their principal office it is possible to shift this from one district to another to escape taxation. Instances have arisen, both among domestic and foreign corporations, where this has been done Where the shifting is with a view to securing better terms of assessment it is sometimes done with the collusion of local tax officials. Assessors are sometimes lenient in order to get the corporation to declare its principal office in their district. Man}- New York city corporations, whose business is practically all located there, have de- clared their principal office to be located elsewhere. Such practices, of course, work injustice among districts and among corporations. The very possibility of its existence is enough to condemn it and demand reform. The valuation of real estate by the different assessors affords a sjiecial problem in the case of corporations. Very often the assessor can only take the officers' word for the valuation since he himself is not competent to judge. Different districts are desirous of increasing their population and business by having industries locate "Article 1, Section 11 of the tax law would indicate that all per- sonal property was to be assessed and taxed locally. In the instruc- tions for preparing the assessment roll, section 21, however, pro- vision is made only for assessing the capital stock as provided for in section 12. This causes only capital stock to be assessed and is another illustration of the inconsistency of the tax law. PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 49 within their borders, and promises of low taxes are often given as an inducement. Injustice is found here as well as in the assessment of personal property and measures are needed to abolish the practices which exist. The method prescribed by law for the assessment and taxation of the personal property of corporations for local purposes is so complex that few, if any local assessors are able to apply it. It is not the value of the share stock that is the basis of taxation, but rather he capital invested in the business. The formula which the assessors are ex- pected to use is somewhat as follows : On one side of the assessment roll is to be placed the value of the total assets of the corporation including the entire value of real as well as personal property, non-taxable as well as taxable. From this is to be deducted the other side of the assessment roll on which is found the value of the stock owned by the state and incorporated charitable or literary societies ; all property exempt b}^ law, including shares of stock of other corporations ; the assessed value of the real estate; debts and surplus, if any, up to the amount of ten per cent of the capital. The sum secured by this process represents the assess- able value of the capital stock. Corporations are requir- ed to make reports but the information thus obtained is so inadequate as to be of little use to the assessors. Since judges and lawyers have failed to reach an agreementn as to the meaning of the law, the assessors cannot be ex- pected to use it successfully. They generally assess indi- viduals and corporations in the same manner. Since per- sonalty so largely escapes an unjust burden falls upon corporations with a large percentage of real estate. Because of these difficulties many have advocated that the local assessment of personal property of corpor- ations be abolished. The State Tax Commission in 1898 made such a recommendation. ^^ It contended that the other corporate taxes involved the taxation of personalty. It wanted to equalize and extend the other taxes so as to reach the source of personal investment, and at the same time relieve the assessors of the hopeless task of finding "Annual Report of New York State Tax Commission, 1898, p. 11. so DEVELOPMENT OF CORPORATtON TAXATION, STATE OF NEW YORK personal property. The special tax commission which re- ported in 1907** thought it advisable to extend the sys- tem of taxing corporations for state purposes so as to in- clude all corporation taxes. It would allow real estate to continue to be taxed locally, but all personal property taxes were to be taken care of through an increased fran- chise tax, a part of which was to be returned to the local- ity. Such a scheme was calculated to give greater equity and more revenue to both the state and the locality. The State Comptrollers for a numbet of years have been asking for reform but without success. The State Conference on Taxation in 191 1 unanimously adopted a resolution asking that the taxes be determined by some simple rule. Governor Dix in his message of 191 1 dealt extensively with corporate taxation and asked for re- form." He suggested that the annual franchise tax be computed upon the par value of the stock. This would insure simplicity in calculation which any tax-payer could understand, and would also eliminate the necessity for the frequent arbitrary judgment of taxing officials. He gave his sanction to a bill which had been introduced proposing a minimum tax of three-fourths of a mill on each dollar of issued capital stock. This was designated as a tax for the privilege of using a corporate name and exercising corporate power. Taxes were to vary with different classes of corporations depending upon the amount of dividends paid. This scheme evidently would have been easy to under- stand and administer, and would doubtless have eliminat- ed much of the litigation caused by the present procedure. It would act as a check upon taxing officials since in each case the amount of the tax paid could easily be compared with the basis upon which it was levied. A further ad- vantage would arise in the tendency to reduce inflated capitalizations. As a license tax little objection can be made to the scheme. " Report of the Special Tax Commission, 1907, Senate Docu- ments, 1907, Vol. 5, No. 11. " Message of Governor Dix. Public Papers of Governor Dix, 1911, p. 73. PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 51 The report of the Comptroller for 191 1 dwelt on the ambiguity and uncertainty of construction in the law. Although his recommendations were adopted by the Sen- ate, they failed to reach a vote in the House. At the ex- traordinary session of that year he made another unsuc- cessful attempt. He suggested that the annual franchise tax be upon the basis of capital stock. The tax, to be paid annually in advance, was to be computed upon the basis of the capital stock employed during the preceding year within the state. The amount of capital stock was to be such portion of the issued capital stock as the gross assets of the business in the state bore to the entire gross assets. The tax rate was to vary, according to dividends paid, from three-fourths of a mill where no dividends were paid to one-fourth of a mill for each one per cent of dividends above six per cent. The minimum tax was fixed at five dollars. The scheme would have eliminat- ed many of the administrative difficulties yet some injus- tice would doubtless have remained. The organization tax has been much discussed. It is generally connected with the phrase "driving capital from the state." If the organization tax be high it is believed capital will seek organization in the more favorable states. From the standpoint of revenue this could make little difiference aside from the organization tax itself, if the foreign corporation tax laws are properly framed. The possibility exists, however, that, where advantages of lo- cation are negligible, and industry may seek the state of lower organization tax. The loss comes largely to the forms of business which would partially depend upon the industry if located within the state. While the organiza- tion tax does not have the effect commonly supposed it may be well to gauge it somewhat by similar taxes in other states. The complete separation of the sources of state and local revenues has been advocated by some as a cure-all for tax evils. No doubt some sources of revenue are bet- ter suited for state taxation, and should be taken over by the state. The great body of local tax payers should not be freed, however, from all state responsibility. In 52 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK New York a small amount of the taxes collected locally are vised for state purposes. Under complete separation the great majority of voters would have no interest in the state revenues other than how they would be spent. Who would bear the expense, would be of little concern and it is not hard to imagine that unwise and burdensome appropriations might be made. However desirable the separation of state and local revenues may be from the administrative standpoint, the social defects overshadow the advantages. In order that the majority of the citizens retain their interest in state offairs and may not be tempt- ed to squander revenues they do not help to pay, it is de- sirable that a part of the locally collected taxes be used for state purposes. It seems the personal property tax is strongly in- trenched. Many tax authorities would willingly adopt the income basis. The past lethergy of the legislature, howex'er, would indicate that we need not expect such a step in the near future. The first reform we can hope to secure is to make the old system more workable as well as more just. In the past recommendations of officials and commissions have met with little sucess. The recent success of reforms, however, in other phases of taxation, leads us to hope that the legislature will yet attempt to ■■simplify corporate taxation. The sooner this can be ac- complished, through the adoption of some suggestion al- ready made or otherwise, the sooner will the courts be lelieved of part of their burdens, the sooner will cor- porate officials be able to calculate the amount of taxes they may be expected to pay, and the sooner will state officials be relieved from much of the unnecessary admin- istrative burden now borne by them. THE STOCK TRANSFER TAX'"' Before leaving the discussion of the general taxation fer tax. In 1881 a bill was introduced proposing to levy a tax of one-fifth of a mill on every dollars of brokers' sales, of corporations we shall briefly consider the stock trans- " In reality this is not a tax upon corporations but upon the ex- change or sale of shares of stock. It does, however, affect them indirectly. PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS S3 In 1887 a bill was introduced to tax the sales of stocks and bonds. Neither bill became a law, and it was not until several years later that the subject came up again. In 1905 the stock transfer tax law was added to the gen- eral tax law.-^" By this act a tax of two cents on every $100, face value, was placed upon the sale or exchange of shares and certificates of stock of all foreign and do- mestic corporations after June i, 1905. Depositing stock as collateral security is not taxable. The payment of the tax is denoted by affixing adhesive stamps, either to books of company making sale (if sale be recorded) or to the memorandum or certificate of transfer where such is given. Heavy penalties are provided for failure to afifix stamps, using canceled stamps, etc., while shares of stock transferred without the payment of the tax cannot be made the basis of legal proceedings. As might be expected the constitutionality of the law was attacked from every possible angle. The greatest con- tention was that it is class legislation, hence contrary to state and federal constitutions. Both the Court of Ap- peals^^ and the United States Supreme Court held that the tax was not upon property but upon the transfer of prop- erty. Since it was uniform in operation upon all trans- fers and upon all persons making them, it contravened neither the state nor federal constitution. The complaint upon interstate commerce was likewise rejected. In 1907^^ the law was amended so as to make the basis for the tax "each share of $100 of face value or fraction thereof," instead of "each $100 of face value or fraction thereof." The amendment made the share, whatever its value, the basis for the tax. By its provisions the tax on 100 ten dollar shares would be two dollars while the tax on ten one hundred dollar shares would be twenty cents. In these two cases the share value was the same yet the tax differed by one dollar and eighty cents. The Court of Appeals refused to sanction such discrepancies on the ground of class legislation since all corporate share hold- " New York Statutes, 1905, Chap. 241. "Hatch vs Reardon, 184 N. Y., 431. Affirmed 204 U. S., 157. " New York Statutes, 1907, Chap. 414. 54 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK ers were not treated alike. The legislature had exceeded their power of classification since such must have some other basis than mere accident, whim or caprice.^" The provision of the law which authorized the comptroller to secure evidence of violation from the private books of the company was likewise declared unconstitutional.^". Cer- tificates of shares turned over to a trust company under the voting trust arrangement, however, were held liable to the tax.^^ The Comptroller has experienced difficulties in examin- ing the records of offices to ascertain whether the law has been complied with. At first the state was defrauded of thousands of dollars because of the wholesale washing and reusing of stamps. Detectives were put to work, however, the offenders arrested, and the practice in a measure checked. Evasions, it would seem, are still pos- sible since the amount of sales reported on the exchanges is much larger than the sale of stamps would indicate. The system of "balancing" and "paying on differences" which is used among brokers will partially explain the difference. Because of evasions, the Comptroller, in his report for igo8, estimated that the state was losing $2,000,000 a year. He suggested as a corrective measure that every person selling shares be required to make a monthly state- ment showing the amount of sales, together with the de- nomination and number of stamps used in paying the tax. T*he system recommended was practicall}' the same as is used in the United States revenue. The desired modifi- cations were not secured. In 1910 a bill making it un- lawful for any but authorized agents to sell stamps, and then only at face value, passed the Senate. In the House the opposition which developed in the interests of the stamp dealers caused the defeat of the bill. A second at- tempt was made at the extraordinary session but with similar results. It was not long, however, until a lavir^^ " Farrington vs Mcnsching, 187 N. Y., 8. '"Ferguson vs Rcardon, 197 N. Y., 236. " U. S. Radiator Company vs New York, 208 N. Y., 144. "New York Statutes, 1911, Chap. 12. PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 55 was passed permitting only authorized agents and banks to sell stamps. This has been effective in cutting down losses from fraudulent transactions. It has also been made the duty of the person making the sale to procure and affix the stamps. Corporations must keep such re- cords as the Comptroller may require, showing date of transfer, numbers of certificate issued and names of pur- chaser. Such records must be kept for two 3rears. The tax met with opposition, not alone from those directly affected but from other sources. Just after its constitutionality had been affirmed, it was attacked on the ground that it established a dangerous precedent for the taxation of energy and industry.^* New York city bus- iness men felt that it was a discrimination against the city. The law had the effect of checking the increase of transactions on the stock exchange. Transactions in- creased much more rapidly on the Boston and Philadel- phia exchanges than on the New York exchange.^* If the law can be shown to greatly check stock exchange transactions its advisability can be questioned. The stock exchange is not all a gambling den and productive of no good as is generally believed. It exercises an important function in establishing a comparatively stable market for securities which greatly aids the progress of industry. It has been advocated that the tax be increased from two to five cents. There is just as much reason for choos- mg the one as the other, it is claimed, while the latter would greatly enhance the revenue. The revenue now secured is quite large and it would be well to leave any possible increase till an emergency arises when it can be used to provide the flexible feature which a good tax sys- tem should possess. It would be better, in some ways, if the tax were based upon the market rather than the par value of the stock. There is no very good reason for taxing a one hundred dollar share selling for three hun- dred dollars as much as one selling for twenty-five dol- lars. A market value basis, however, would increase "" The Outlook, May S, 1906. Vol. 83, p. 5. ** Pennsylvania adopted the stock transfer tax in 1915 while Massachussets adopted it the previous year. 56 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK the administrative difficulties of the tax. In general it is a fair tax, easily assessed and productive of considerable revenue. CHAPTER IV THE TAXATION OF FOREIGN CORPORATIONS The treatment of foreign corporations in New York State has varied widely. The legislature has dealt with such corporations, either by enacting statutes which af- fected the class as a whole or by laws designed for a par- ticular kind, as insurance companies or banks. We find that the first legislation was most drastic. Until the year 1814 the insurance business was left entirely open to all who chose to undertake it. In that year the Phoenix Fire Insurance Company of London established an agency in New York. Since at this time England and the United States were at war and contracts with alien enemies could not be enforced, a bill, entitled, "An Act to Suppress Foreign Influence in this State," was introduced into the legislature. After an amendment had been added, which explained the object of the bill, it became a law.' All foreign insurance companies or their agencies were ex- cluded from carrying on business in the state under a penalty of one thousand dollars for violation. This oc- curred at a time of exasperated feelings toward England but it had a marked influence upon later legislation con- cerning alien insurance companies. This action was not intended to apply to companies which were chartered by other states and doing business in New York, but it was not long before laws dealing with this class were added. Since at this period insurance companies were the only foreign coporations which did business of any importance within the state, the laws were made applicable to this class alone. A law passed in 1824^ stipulated that any person who thereafter acted as an agent for any individ- ' New York Statutes, 1814, Chap. 49. = New York Statutes, 1824, Chap. 257. 57 58 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK ual or association of individuals which was not incor- porated under New York law, (even though they were formed under laws of other states) for the purpose of car- rying on a fire insurance business, must render to the comptroller an annual sworn statement of the amount of premiums which he or any other person had received for insurance effected by him. The statement was to be for the year ending September first, and on or before Febru- ary first he was to pay into the state treasury ten per cent on the amount of all premiums. To insure that the stipulated returns would be made a bond of one thousand dollars was required of every agent. If such were not furnished within three months after the passage of the act he was to be fined five hundred dollars. This was the system by which the foreign companies were taxed until 1837 when the law^ was modified so as to reduce the tax on premiums from ten per cent to two per cent. Domestic companies came under the g-eneral corporation tax law of 1823 and were taxed upon capital stock while the foreign ones were taxed upon premiums received. This lack of uniformity in the basis for the tax was not accepted as entirely satisfactory by the officials.* In reality, it amounted to a discrimination which operated very unfa- vorably to the foreign companies, for the taxes imposed proved to be almost prohibitory. A committee was ap- pointed to investigate the taxaion of foreigTi insurance companies and made a report to the legislature in 1847.^ They admitted, with some reluctance, that foreign cor- porations must be taxed upon a different basis from do- mestic, but opposed a suggested increase in the rate. They held that the citizens of the state and especially of New York City had suffered from the prohibitory taxes which had been placed upon foreign insurance companies. The business interests of the community, they said, re- quired the encouragement rather than exclusion of for- 'New York Statutes, 1837, Chap. 30. * The report of the Committee on Banks and Insurance Com- panies, (Assembly Documents, 184S, No. 80) pointed out that this dual classification of the companies caused trouble in trying to equalize the tax paid by different companies. "Assembly Documents, 1847, Vo. 8, No. 251. THE TAXATION OF FOREIGN CORPORATIONS 59 eign agencies, at least until such time as the state, by wise and judicious laws, should secure the establishment of insurance funds sufficient to meet the exigencies of ordinary business. They even questioned the constitution- ality of the law, suggesting that it ran counter to the fed- eral constitution.® Because, then, of the doubtful con- stitutionality of the law and the wholesale evasions which vvere practiced under it, they asked for its repeal. While early legislation was thus distinctly hostile to insurance companies incorporated without the state, the first law dealing with foreign capital in general was of a very different nature. In 185 1 the legislature attempt- ed to increase the amount of foreign business carried on in the state. A law passed in that year" provided that products from any state of the United States which were consigned to agents in New York, would not be assessed to the agents. Neither were the agents of moneyed cor- porations or capitalists to be taxed for any moneys in their possession or under their control, transmitted to them for the purpose of investment or otherwise. Under such an act there is little doubt that there was discrimina- tion in favor of the foreign organizations. Not only was a large part of the money sent here free from tax but practically all goods manufactured outside the state and sent here for sale escaped taxation. The money in the hands of citizens and corporations of the state no doubt escaped taxation to a large extent, which made the dis- crimination here more formal than real. The exemption 'Federal Constitution, Art. 4, Sec. 21. This provides that the citizens of each state shall be entitled to all privileges and immuni- ties of the citizens in the several states. It has not been held, how- ever, as applicable to corporations. A corporation is an artificial person but not a citizen. Chief Justice Taney pointed out (Bank of Augusta vs. Earle) that a corporation could have no legal ex- istence outside the boundaries of the state by which it was created. It existed only by force of law and where the law ceased to oper- ate, the corporation could have no existence.. It was by the law of comity among nations, he pointed out, that a foreign corporation was allowed to make contracts and sue in the courts of another state. Neither is it unlikely that a state, thru the exercise of its "police power," could discriminate against foreign corporations so long as it was considered that the protection and welfare of its citizens demanded it. 'New York Statutes, 18S1, Chap. 176. 60 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK of goods sent to the state, on the other hand, worked as a burden upon the domestic producer since the home- made goods could not easily escape taxation yet had to compete with the goods which were sent into the state. The law in this form, however, was of short duration. In 1855 a statute^ was passed which provided that all non- resident persons and associations doing business in the state, as merchants or bankers, whether as principles or as agents, should be assessed and taxed on all sums in- vested in such business as if they were residents. Al- though this law did not affect money sent here to be in- vested yet it eliminated to a great extent the other forms of discrimination which existed under the previous law. There was at least an attempt to place foreign cor- porations upon a par with those incorporated under the New York laws. It soon became evident that both the general law and the one affecting insurance companies needed interpre- tation by the courts at some points. The assessors had put upon the assessment roll the amount deposited with the Comptroller as a perequisite to doing business in the state." The British Commercial Company refused to pay the tax upon this and carried the case to the Supreme Court. ^^ which held that securities so deposited were to be considered as an investment and were liable to assess- ment and taxation.'* It was also necessary that the courts make some detemiination with regard to the situs of property. Any personal property of a non-resident which was located in the state was liable to taxation, with only such exceptions as the statute law had made.'^ This ' New York Statutes, 1855, Chap. 37. "Chapter 95, New York Statutes, 1851, required a deposit of one hundred thousand dollars in securities with the comptroller. "British Commercial Life Insurance Company vs Commsisioner of Taxes, 28 Barbour, 318. " In 1853 (New York Statutes, Chap. 463) the requirement of a deposit with the comptroller was repealed, and the court held (Peo- ple vs New England Mutual Life Insurance Company, 26 N. Y., 303) that even though some corporations did not immediately with- draw the securities, they were no longer taxable as money invested in the state. " Hoyt vs Commissioner of Taxes, 23 N. Y., 224. THE TAXATION OF FOREIGN CORPORATIONS 61 was to apply only to property which was capable of hav- ing a situs and which really had one. Property in transit through the state for instance, was not taxable. In an- other case ^^ it was held that goods which a non-resident owner had sent to the state for the purpose of sale, with- out reinvesting the proceeds, were not liable to be' taxed. The act, it held, was only designed to reach the capital of non-residents which was employed in the state in a continuous business, and not property sent merely to find a market. The last two decisions were reversals of the opinions of the lower courts and increased inequalities between domestic and foreign producers. By a law of 1862'* life and health insurance companies from without the state were put upon the same basis as other insurance companies, especially in regard to the two per cent tax on premiums. In 1865 the attitude of the legislature towards retaliatory methods was shown. Some states it seems, had been discriminating against New York insurance companies. A law ^^ was passed aiming directly at such states.^* It provided that if an)' state imposed greater penalties upon an insurance com- pany incorporated under New York laws than upon its own companies, then equal penalties should be imposed upon companies from that state doing business in New York. The state of Pennsylvania required a payment of three per cent of the premiums received by a foreign in- ^' Parker Mills vs Commissioner of Taxes, 23 N. Y., 242. " New York Statutes, 1862, Chap. 300. " New York Statutes, 186S, Chap. 694. " The general facts with regard to retaliatory insurance taxation are well known. To a greater or less degree the majority of the states have used this weapon against foreign insurance companies. In 1910 the National Tax Association adopted a resolution to the effect that a uniform method of taxing premiums, both foreign and domestic, should be adopted by the several states. Hon. Geo. Curtis, at a general public hearing on the report and bill of the Wisconsin Tax Commission relating to the taxation of life insurance companies reviewed the facts and effects of "retaliation" taxation upon insur- ance companies. He thinks such laws have often served a just pur- pose, and if their existence and enforcement would tend to secure the needed uniformity, it would be an additional reason for their retention. If the laws should become uniform, then the retaliatory effect would become inoperative. 62 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK surance company. Because of this the court held ''' it justifiable that New York should demand the same per- centage of premium from a company incorporated in Pennsylvania. The scheme of taxing foreign corporations was, how- ever, far from satisfactory. The court had decided^* that the part of the law of 185 1 which exempted from tax the capital in the hands of agents for the purpose of in- vestment was not repealed by the act of 1855. A large amount of capital which practically escaped taxation con- tinued to come into the state. The practice which foreign banking houses followed is a good illustration. They would have a permanent agency established in the state to which they would send money to be employed in temporary loans. Since they were subject at all times to the control of the home office, such funds were held to be exempt from taxation. A large number of banking houses of other states and Canada established such agencies. They came and received the protection of the laws, courts, and police, yet paid no taxes. This was a discrimination in favor of foreign capital since the domestic institutions of the same kind were taxed, at least upon their capital which, in part, was the basis of their ability to extend loans. In addition to the local burdens, national banks had to bear the tax imposed by the federal government. Because of the tax, the profits which the foreign representatives received were greater than the domestic houses realized upon similarly employed capital. Year after year the state assessors and comptrollers pointed out the evils and asked for re- form. They did not ask for legislation which would make it difficult for foreign capital to come to the state, but for some measure which would put all upon an equal footing. "The owners of foreign capital," said the as- sessors, "would have no cause for complaint if taxed in tlie same manner as citizens, but citizens have a just cause "People vs Fire Association, 92 N. Y., 311. Affirmed, 119 U. S., 110. " Bank of Montreal vs Commissioner of Taxes, 59 N. Y., 40. THE TAXATION OF FOREIGN CORPORATIONS 63 for complaint when the laws favor foreign capital. ^^ The noted tax commission which reported in 1871 ^^ recommended that foreign insurance companies be assess- ed and taxed under the laws which applied to domestic companies, and that thereafter the same statute should apply to both. To illustrate the way in which the law as interpreted worked, we shall notice the case of the Manchester Plate Glass Company. This was an English concern which maintained a store in New York City. They were assess- ed $150,000 upon goods not contained in the original packages in which they were imported. The assessment was not allowed to stand because the proceeds from the ?ales were not invested here but were remitted to the for- eign house. In reality, the way in which the law was en- forced and interpreted placed no tax upon the foreign banking business carried on in the state, while domestic capital used in the same business was taxed. The products of foreign manufacturers, under certain conditions easily complied with, were exempt from tax- ation while the domestic manufacturers of similar articles were taxed. The Commissioner of Taxes and Assess- ments for New York City, in his report for 1877^' says that if the purpose were to specifically protect for- eign capital and foreign industres at the expense of home capital and industries no more effective law would be needed. He asked for some equalizing remedy — either to tax foreign industry or remove the burden from home industry. Finally, in 1880, the legislature responded to these de- mands and passed two laws, one relating to the taxation of foreign bankers^^ and the other to fire and marine in- surance companies.^* The first of these stated that every "Annual report of the State Assessors, 1880, Senate Documents, 1880, Vo. 1, No. 26. ""Assembly Documents, 1871, Vol. 3, No. 265. See note. p. 16. " Annual Report, Commissioner of Taxes and Assessments, New York City, 1877. =' New York Statutes, 1880, Chap. 596. " New York Statutes, 1880, Chap. 542. 64 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK organization, created under laws other than those of New York, and in any manner engaged in banking business in the state, was to pay annually to the state comptroller a tax of one half of one per cent on the average of all sums of money used in the state during the year. The organizations were required to make returns which would give the proper data upon which to base the assessment. As a penalty for any failure to make the required returns, the law provided that ten per cent of the amount of the tax should be added. With regard to fire and marine insurance companies, it was provided that such organiza- tions, created without the state, should pay a semi-annual tax of eight-tenths of one per cent on the gross premiums which they received from business transacted within the state during the previous six months. They were to make semi-annual reports which would show the amount of the premiums they had received. Lands and real estate were to be taxed where situated, but capital stock and personal property were to be exempt. We note here the introduction of the semi-annual payment of the tax, a feature which is in use in many of the western states with all taxes, but which we do not generally find in New \'ork. In these two laws opposite tendencies are quite marked ; in the case of banks, a tax was imposed which did not before exist while in the case of fire and marine insurance companies the tax was reduced. Foreign cor- porations, other than those just discussed, were affected by the general corporation tax legislation of 1880 and 1881. By this, the capital of foreign corporations as well as that of domestic corporations was made subject to the annual franchise tax. The court held,^* too, that the basis of the annual franchise tax for foreign corporations was the entire capital and not the portion of it which was employed within the state. Such a principle was unques- tionably unjust, but such was the law until 1885. In that year the legislature limited the franchise tax to the amount of capital employed in the state. This legislation did not receive the approbation of the foreign corporations. Shortly after the passage of the "People vs Horn Silver Mining Company, 105 N, Y., 76. THE TAXATION OF FOREIGN CORPORATIONS 65 law representatives of these organizations met in the Met- ropoHtan Hotel to take some action of protest against the tax levied upon their capital stock. It was claimed that the law under which they were required to make statements to the comptroller in regard to their business was a discrimination against them. The tax was collect- ed directly by the comptroller and was based entirely up- on the success of the business. The reports which were re- quired worked a hardship upon them since it threw their business open to the inspection of their competitors. Such were some of the grievances and the meeting resulted in the unanimous adoption of a resolution instructing a com- mittee to prepare petitions to the legislature asking for the repeal of the laws. Every corporation interested was assessed one-fourth mill on every dollar of their capital stock to pay the expenses of such suits as might be insti- tuted by the comptroller to enforce the payment of taxes under the law. The results of this meeting show that the foreign corporations were not g'oing to surrender the privileges which they had enjoyed without a fight, and subsequent litigation shows that they made use of the one- fourth mill assessment. As might be expected the new legislation caused a large amount of litigation. A few cases will suffice to illustrate the nature of the difficulties left for the courts to decide. One of the troublesome problems was to de- termine when a corporation was doing business in the state. The American Bell Telephone Company had been carrying on a business in the state through local compan- ies acting as its agents. It had no officers but did its bus- iness entirely through agreements made with local com- panies. Because of this arrangement, it claimed that it was not doing business here under the meaning of the law. The lower court held-^ that in order to render any company taxable, no proportionate amount of its business was required to be transacted in the state. If any of its business had been carried on in any way, it was liable to "People vs American Bell Telephone Company, SO Hun, 114. 66 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK the tax. The Court of Appeals-" refused to take this view and held that where the foreign company had leased and licensed the use of telephones in the state under con- tract between the parties, it was not carrying on business under the meaning of the act. The business which was carried on, it held, was being carried on by the local com- panies and they were subject to the tax. In another case^" it was held that a company which was organized under the laws of another state and which had property in N^ew York, could not claim exemption from taxation on account of the laws of its own state. The question of interference with interstate commerce was one which very frequently arose. Of the multitude of cases which came before the courts we shall note but two tvpical ones. A manufacturing company which did a part of its business in the state claimed that the regula- tion of commerce between states was the sole prerogative of the federal go\'ernment, and that the taxation violat- ed this principle. The Court of Appeals held-'' otherwise and ruled that there is no limitation upon the power of a state to exclude a foreign company from doing business within its limits, or to exact conditions for such privi- lege, save when the corporation is in the employ of the federal goA-ernment or where its business is strictly com- merce. The fact that legislation upon the subject might indirectly affect commerce did not render it unconstitu- tional. Property engag'ed in foreign or interstate com- merce, might be taxed the same as domestic property but no more. The other case which we shall notice was one in\nlying the Pennsylvania Railroad. The line of the company ex- tended into other states but not into New York. It oper- ated a iervv in connection with its road across the Hudson "People vs American Bell Telephone Company, 117 N. Y., 241. In New York the Couit of Appeals is the highest court and corres- ponds to the Supreme Court of many states. "People vs Coleman, 135 N. Y., 231. The court here said that it seemed the legislature might constitutionally impose double tax- ation but its purpose so to do may never be inferred, but must plainly appear. ^Southern Cotton Oil Company vs Wemplc, 131 N, Y., 64. THE TAXATION OF FOREIGN CORPORATIONS 67 to the city of New York where it had terminal facihties. It used these facilities for receiving and delivering freight and passengers. It collected money there for tickets and maintained a large force of workmen. This terminal was assessed and taxed ; then the company carried the case to court on the ground that the state was interfering with interstate commerce. The court of Appeals re- fused-" to allow the tax to stand since the business engag- ed in was exclusively that of interstate commerce. A for- eign corporation which was engaged both in the business of state and interstate transportation in the state was, how- ever, subject to taxation in common with domestic corpor- ations. From these decisions and other similar ones, it .seems the court attempted to establish the principle that a state can levy a tax upon property engaged in interstate commerce so long as their is no hostile discrimination against such property. It would seem, however, that property which belongs exclusively to interstate com- merce cannot be taxed by the state. The system thus far devised did not prove satisfac- tory. The corporations relied more upon evasion than upon the courts in their attempts to escape the tax. Banks made such excuses as, even though they furnished the money, they did no business — ^that it was carried on by their agent. In other cases they claimed that they used no money. Some refused because they were neither cor- porations, companies nor joint stock associations "creat- ed" under laws other than those of New York, but were formed under "common law" in their native state. Others refused to comply with the law on the ground that they were either partnerships or individuals. These and other excuses which the minds of the legal advisors could con- coct were given, instead of making the reports and paying the tax. The law pro^'ed to be practically a dead letter since in 1889 only five banks paid any tax. A large num- ber were reaping profits from the state, yet were bearing no share of the public burdens. Each successive report of the comptroller pointed out the evasions and difficulties and asked for modification, but it was not until 1894 that ''People vs Wemple, 138 N. Y„ 1. 68 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK the legislature attempted to give relief. In that year a law was passed''" which purposed to deal with the difficulties in regard to the foreign banks. It provided that every foreign banker doing a business in the state was liable for the payment of an annual tax of one-half of one per cent on the amount of business done in the state during the year ending December thirty-first. The amount of business which was carried on was to be computed by finding the daily average for each month, of the moneys received, used, or employed in connection with the business. The aggregate of such monthly aver- ages was to be divided by the number of months in the year. Each bank was to make a report as to the amount of business and tax due to the state on or before Febru- ary first. In the case of failure to do this, or if the report was not satisfactory, the comptroller was authorized to examine the books and records of the bank for the pur- pose of determining the tax. A penalty of ten per cent of the tax was imposed when there was a failure to make the report. It further required the institutions to keep the financial accounts of the business so that they could be examined by the comptroller at any time. All taxes and penalties ,in cases of failure to pay, were to be recov- ered by action brought by the Attorney-General. Here we see that the determination of the tax was not left en- tirely to the banks, but power is given to state officials to investigate and verify reports. This is perhaps the most marked advance over previous legislation. In 1895 a license tax — corresponding to the domestic organization tax — of one eighth of one per cent was plac- ed upon all foreign corporations (except banks and in- surance companies) doing business in the state. '^ The amount of capital employed during the first year was to be the basis of the tax. In 1896^^ the law in regard to ™ New York Statutes, 1894, Chap. 196. " New York Statutes, 189S, Chap. 240. " New York Statutes, 1896, Chap. 908. The difficulty had still re- mained of bankers claiming they did not come under the law. This law explicitly pointed out that the term foreign banker was to in- clude (1) every foreign corporation doing a banking business in THE TAXATION OF FOREIGN CORPORATIONS 69 foreign bankers was so amended as to set forth in detail just who came under the provisions of the act. By an act passed in 1892^* the capital of any insurance company, incorporated under the laws of any state or country out- side of New York, to the extent employed in business in the state was to be subject to taxation the same as the capital of a like domestic insurance company. Such taxation was to take place where its principal office was located. By this same law all foreign insurance compan- ies, — life, health, marine — doing business in the state, were to pay two per cent of all premiums received. The license fee of one eighth of one per cent brought results which were immediately noticeable. The law, in reality, did not go into effect until the first of December, yet the tax received for the month was over $1300. Four companies which had been organized without the state, yet did practically all the business here, immediately re- organized under New York laws. Not only did the law produce a license tax, but-it greatly increased the organi- zation tax since the inducement of a low organization tax which other states held out was no longer a gain to a company which had most of its business in New York. The total organization tax received by the state in 1895 was $258,464 while in 1896 it amounted to $503,951. The Comptroller, in his reports for 1895 and 1896-''^ was very enthusiastic concerning the good effects of the license fee. In the second of these reports he pointed out that in addition to the increase from licenses, the state had received a large increase of the capital stock tax. This was because many corporations, which would other- wise have escaped notice, were brought to the attention of the department through the payment of the license. These modifications in the laws caused an increased the state except national banks ; (2) every unincorporated associa- tion of two or more individuals organized under the laws of another state or country; (3) every association of two or more individuals, if the members owning more than half of the interest or entitled to more than half of the profits were non-residents ; (4) every non- resident doing a banking business in his own name. " New York Statutes, 1892, Chap. 690. " Annual Reports, New York State Comptroller, 1895 and 1896. 70 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK amount of litigation. A few cases will serve to illustrate the nature of the questions which arose. Some domestic corporations sought to evade taxati(i«i'i:)y consigning their property to agents. The lower courts held that such property was not exempt but was taxable to the agent. The Court of Appeals held that such property was taxable, but that it should be assessed to the corporation at the place where it was located."'" Difficul- ties arose in placing a value upon the capital of foreign corporations for the purpose of taxation. In such evalua- tions the court held'*'' that the par value of the stock was to be used as the proper basis. The questions as to what effect the guixl will, debts and surplus of foreign corporations had upon their valu- ation were left for the courts to decide. Where the good will enjoyed by one firm was transferred to a corpora- tion organized to continue and take over the business, such good will was an asset and was to be considered in determining the amount of capital employed in the state. In fixing the amount of the capital the same proportion of the value of the entire good will was to be taken as the amount of the tangible capital employed by the corpor- ation in the state bore to the entire amount of tangible capital'*** Copyrights granted b^■ the government, how- ever, were held to be without the taxing power of the state.''''' Some companies had purchased propertv in the state and had not made full cash ])ayments for it. ^^^^en such purchases were made, so held the court, ^" and the company paid cash for a part and promised to pay the balance in the future, or paid no cash but promised to pay in the future, the amount still due upon the property was to be deducted from the value of the property in or- der to ascertain the "sum invested" in the state upon which the law held them taxable. In case all the corpor- ate property and business of a foreign company were in " Boardman vs Supervisors, 22 Hun, 231 ; 85 N. Y., 359. " EUioll-Fisher Company vs Lohnier, 206 N. Y., 10. "' Koecht and Company vs Morgan, 183 N. Y., 359. " Joliwroii Company vs Roberts, 159 N. Y., 70. "People vs Barker, 147 N. Y., 31. THE TAXATION OF FOREIGN CORPORATIONS 71 the state, the corporation was entitled to have the amounts of its debts deducted from the amount of capital employ- ed in the state.*^ The question of dealing with the surplus arose in sev- eral cases. A West Virginia advertising company was incorporated for $5000 but was employing $40,000 in New York. The comptroller fixed the basis of the tax at $40,000. The court ruled that no matter how great the aggregate property of a corporation was, the "capital stock" — the basis of the tax — could not exceed the amount authorized by the charter. The company might employ surplus and not increase capital stock, and the surplus not be subject to taxation.^'' At another time the court held that surplus earnings of a foreign company, carrying on a portion of its business in the state, which were invested in real estate, could not be taxed.** The attitude of the court in the McLean case has made it difficult to collect taxes from foreign companies. No action it held, could be taken against the person so there is left ony the recourse of proceeding against the property. That such has been ineffective is shown by the fact that from 1901 to 1913 the annual tax collected for non-resi- dents in New York city decreased nearly fifty per cent.*'" These laws, as thus interpreted, constitute essentially the present system of taxing foreign corporations. We have the general law covering all classes, and special leg- islation in the case of banks and insurance companies. A little consideration of the above interpretations will convince one that they provide the way for the escape of much capital which the law intended to tax. That a large amount of evasion was being practiced was pointed out by the Comptroller in his report for 1895.'"' He had been convinced by a little tentative work that several thousand taxable foreign corporations employing a whole or a por- tion of their capital in the state, were not yet upon the "Journeay vs Roberts, 27 Supreme Court, App. Div., 1. *' Advertising Company vs Roberts, 151 N. Y., 621, "People vs Wemple, ISO N. Y., 46. "City of New York vs McLean, 170 N. Y., 374. *' Annual Report of New York State Comptroller, 1895. 72 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK comptroller's books. Many had failed to secure a certifi- cate authorizing them to do business in the state, and such could only be discovered by personal examination. The license tax to some extent alleviated the difficulty but by no means eliminated it. The exemption of the surplus paved the way for as much evasion of the tax as any other feature of the sys- tem. Corporations are not slow to claim that the money employed in the state is surplus and that the real capital is invested outside of the state. They claim that they are exempt from taxation because they have more surplus than the amount used in New York. A New York citi- zen might incorporate in another state for $5000 and by issuing bonds or establishing a so-called surplus, practic- ally escape taxation. It was an incentive to under-capi- talization for by such organization a surplus was automat- ically created. Numerous suggestions for reform were made. In his report for 1898,*' after pointing out the condi- tions, the State Comptroller made the suggestion that they should cease trying to tax the capital stock created by the laws of another state. He considered it would be better to assess an annual tax upon the right to do busi- ness in the state. He suggested, as the measure of this taxation, such part of the authorized capital stock of the foreign corporation as its tangible assets in New York state bore to its entire tangible assets. He even went so far as to incorporate these recommendations in a bill which he had introduced into both houses of the legis lature. It was aimed at the practice of corporations go- ing to another state and incorporating for perhaps several million dollars while their entire business in New York was carried on with only a few thousand dollars in capital stock. The bill did no pass, and the Governors' mes- sages's^** and comptroller's reports continued to point out "Annual Report New York State Comptroller, 1898, Assembly Documents, 1898, Vol. 1, No. 3. "Governor Odell, in his message to the legislature in 1902 (Sen- ate Documents, 1902, Vol. 1, No. 2.) pointed out that certain com- panies had taken the amount of their corporation holdings in the state and incorporated under the same name and with the same THE TAXATION OF FOREIGN CORPORATIONS 73 the inequalities and ask for reform. Not only were the state officials dissatisfied, but the special tax commission which reported in 1900*^ decried the conditions and asked for reform. In 1906^" the legislature passed a bill which was practically the suggestion made by the comptroller in 1898. This remedied the evil of having a large capitaliza- ton without the state and only a small amount employed in New York, even though a large amount of the busi- ness were done here. It did not, however, remedy the evil of exempting the invested surplus from taxation. A company with a small capitalization might still have a large amount of assests, and yet escape with a compar- atively light tax. The law^* which exempts from taxation such compan- ies as are employing at least forty per cent of their capi- tal in manufacturing has been taken advantage of by for- eign corporations. They organize small companies Linder New York laws, such organizations often having the same name as the foreign corporation with the words "of New York" added. The foreign company owns all of the share stock of the domestic company, and it frequently happens that the domestic company pays no dividends. The net returns find their way back to the parent foreign corpora- tion. The provision which exempts the goods of a for- eign corporation from tax if the proceeds from ihe sale are transmitted to the home office, no doubt often works as a discrimination against domestic producers. A for- eign company can fill a warehouse with goods and keep them as long as it desires without paying a tax, while a officers as designated in the incorporation in other states. This al- lowed them to evade taxes for which they would otherwise be lia- ble. He suggested that no corporation be allowed to form with the same name as that borne by a corporation of another state. Gover- nor Higgins (Senate Documents, 1906, Vol. 1, No. 1) contended that a corporation organized eleswhere to do business in the state and which was a foreign corporation in name only, thereby obtain- ed an unfair advantage over the legitimate domestic corporation which incorporated under New York laws. " Report of Special Tax Commission, Senate Documents, 1900, Vol. 1. No. 7. "New York Statutes, 1906, Chap. 474. "New York Statutes, 1901, Chap. 558. 74 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK domestic company under similar conditions would be tax- ed. By a law passed in 1900°" every foreign banker is required to pay a tax of five per cent on the amount of interest or compensation of any kind earned and collected by him on money loaned, used, or employed in the state. In dealing with foreign corporations, two conflicting policies have been followed. One has l^een that foreign capital should be attracted in order to de\eIop large indus- try within the state. The other tendency has been to pro- tect domestic capital. While each of these proposals has its advocates, it would seem better not to discriminate be- tween the two classes of capital, but to treat all capital within the state under the same conditions, on an equal basis. Only by doing this can it be insured so far as tax- ation is concerned, at least, that competition will be up- on an equal basis. Whatever be the method in use, then, for taxing the domestic corporations, the same should be applied to the foreign. Much has been said about im- posing greater burdens upon foreign corporations than upon foreign individuals doing business in the state. The individuals pay a tax upon the property but do not have to pay the license and franchise taxes. But this question no more applies to foreign corporations than to corpora- tions in general. If it be decided that the corporate form gives advantages which enable it to pay higher taxes than the individual, then the foreign corporation should bear them as well as the domestic. If we had a uniform system of taxing corjiorations for all the states, then our problems of driving out or at- tracting capital would be minimized. But since we have such varied systems, the states should endeavor to treat all concerns doing business within their borders upon an equal basis. There would be at least some tendency to uniformitv, for the states which imposed harsh burdens upon their corporations would not only keep foreign capi- tal from coming to them, but would tend to force domes- tic capital outside their borders. As long as New York uses the franchise tax upon capital stock as the basis for taxing a large part of its corporations, this also should " New York Statutes, 1900, Chap. .SOO THE TAXATION OF FOREIGN CORPORATIONS 75 be used in the case of the foreign corporations. We have seen that the amount of capital stock in the state was con- sidered as that proportion of the whole capital stock which the assets in the state bore to the total assets. We also saw that this was largely evaded by a small capitalization and the use of surplus in the state, which the courts have held could not be taxed. Such evasions should be mini- mized. One way in which this could be accomplished would be to change the basis of comparison. Perhaps as fair a way as any under the existing circumstances would be to consider both the capital stock and surplus as "capi- tal stock" for the basis of the tax. And so long as classi- fications of capital stock are made according to the amount of dividends paid, more or less confusion will result. We have pointed out in another chapter the difi- culties which this provision occasions. Under the present scheme of apportionment, equality is not always obtained because the dividends accrue only partially from business done within the state. The amount of business which a foreign company carries on within the state bears no constant ratio to the amount of its assets found here. Hence taxation which takes for its basis the capital stock, classified according to the amount of dividends paid, and in proportion to the. amount of assets found within the state, is not fair. Then, too, the provision exempting goods from taxa- tion which are sent -here to agents should be modified. As the home producer is made to pay tax upon the goods he has in stock, it is unfair discrimination to exempt the foreign goods. The assessors should be allowed to as- sess such consignments on the same basis as they assess other goods. Since for the present at least, we are to use the capital stock as the basis of the tax, the question arises as to the best way of determining the amount "employed" in the state. Can we find a more equitable basis than that of assets? A little investigation convinces us that the entire assets of some foreign corporations consist of an office in New York City. Yet it by no means follows that this represents the importance of New York to the company. 76 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK For psychological, economic, or geographic reasons the entire business of the company may be carried on through this office. As much of it may be with New York citi- zens or foreign countries as if itwere a domestic company. Because such company has no assets in the state should it escape taxation ? We think not. Perhaps it would not be far amiss to take, instead of the assets, the amount of business transacted within the state as the proper propor- tion of the company's capital to be taxed. Surely the amount of business represents more the contribution of \'ew York to their ability to pay taxes than does the amount of assets found within the state. The amount of business carried on could be determined from reports from the corporations subject to investigation by the state officials. The method just outlined would be preferable to an income tax which has been advocated by many. Such a tax would be satisfactoi^y and just, no doubt, if income were taken as the basis of taxation for domestic compan- ies as well. But if we take a percentage of the income from foreign companies while we tax domestic compan- ies on their capital stock, we would be taxing companies carrying on a similar business upon different bases and could not hope to realize the desired equality. If the state should adopt some other method than the capital stock basis for its domestic corporations, then we could apply the same to the foreign companies. Whatever the meth- ods in use, however, it should lie applied to both in order that as near an equality as possible be attained. ^'-^ '' The Joint Legislative Committee on Taxation, which made a report to the legislature February 19, 1916, pointed out the need for changing the method of taxing foreign corporations. The evils of the present system were enumerated but no remedies suggested. The part of the report dealing with foreign corporations closes : "From every point of view, whether from that of the cost of the service, the benefit derived or the abihty to pay, the answer is clear : foreign corporations should contribute liberally to the support of New York State government." CHAPTER V. TAXATION OF INSURANCE COMPANIES AND MANU- I^ACTURING CORPORATIONS In the preceding chapter we noticed that foreign in- surance companies were subject to special taxes in New York. This was not at first true of domestic companies which were taxed on their capital stock under the general tax laws of 1823 and 1828. In 1824 the legislature gave a few specified insurance companies the privilege of pay- ing to the treasurer of the county in which they did busi- ness ten per cent upon all dividends, profits, or incomes in lieu of the tax on capital stock. ^ The variable nature of the capital stock of insurance companies proved to be a source of difficulty in applying the tax. The matter was brought to the attention of the legislature by the Renssel- aer Insurance Company. On June 20, 1820 it had a capi- tal stock of $199,880.90, but a cinfiagration loss reduced it to $87,536.45. In 1821 it was increased to $101,- 781.89, but it was still assessed on the amount before the loss. The legislature, upon receiving the company's peti- ion, enacted that the sum last named above should be tak- en as its capital stock until additions were made to it. The general insurance law of 1849 made provision for uniform reports as to the amount of capital stock and other financial details but made no change in taxation. The rise of mutual companies created a new problem for the legislature and the courts. Such companies sought to escape taxation because they were not formed under the general law neither had they "capital stock." At- tempts to assess capital stock to them led to litigation. The Buffalo Mutual Insurance Company had a fund of $100,- 000 invested in securities, the income from which went to 'New York Statutes, 1824, Chap. 321. 77 78 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK the policy holders. The company had no other invested capital yet this fund could not be withdrawn or divided. It was virtually a trust fund for the policy holders. The court held that the company was a moneyed or stock cor- poration deriving an income and was liable to taxation upon such a fund as caiptaP The Sun Mutual Company had been accumulating a surplus from premiums paid in by members as a fund from \vhich to meet the losses and expenses that might arise during its existence. Cer- tificates were issued to the members which stated their in- terest in the surplus fund. The court held that wherever a mutual insurance company accumulated from its profits a fund to continue liable for its losses during the term of its existence, and issued certificates to members stating their interest therein, such accumulation l:)ecame capital. The certificates were not evidence of debt but represent- ed the interest of the members in the capital, and such a company was liable to taxation upon the capital so accum- ulated." A number of other cases that raised virtually the same issues were decided in the same way.''^ The legisla- ture finally cleared these issues by first declaring that the 'Buffalo Mutual Insurance Companv vs Supervisors, 4 Comstock, 443. 'Sun Mutual Insurance Company vs City of A'ric York, 8 N. Y., 241. " The fees exacted from insurance companies for the performance of certain transactions have varied at different times. In 1853 one law (Chap. 463) provided for fees payable by life and health com- panies while another (Chap. 466) imposed similar requirements on fire insurance companies. A declaration was to be filed in the office of the comptroller, setting forth intentions to form a company, for vhich a fee of twenty dollars was to be collected. For depositing their certified charter and securities foreign companies were assess- ed a like fee. For every paper filed by the county clerk, he was to charge ten cents. Under the act which established the state insur- ance department in 1850 (Chap. 366) the fees were increased. Thirty dollars were assessed for filing the declaration or certified charter ; twenty dollars for filing the annual statement ; three dollars for every certificate of agency; one dollar for filing each folio of paper in the office. The fees were to meet the expense of maintaining the insurance department. In case they should fail to do this, the deficiency was to be assessed annually pro rata upon all stock in- surance companies of the state. In 1868 (Chap. 732) the fee for filing the annual statement by all marine and life insurance com- panies was fixed at fifty dollars. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 79 mutual companies were taxable* and later by taxing them on an arbitrary sum of $100,000 personal property and no more.^ For many years, then, insurance companies had been taxed like other corporations, and there is very little indi- cation that it was thought they should be taxed otherwise. Evidence of the growth of a new opinion, however, is found in an editorial of the Nczv York Times in 1879: Insurance companies require distinct treatment. Rules applicable to other corporations are inapplicable to these or to any corporation whose operations invilve the exercise of thrift or prudence on the part of the public. Fire and marine insurance companies maintain indeed, certain general resemblances to other forms of business and are riot likely to be injured by the taxation of their capital and of so much of their accum.iilations as may be found in real estate. Life insurance stands upon a different footing, So many of the companies as possess stock capital can be taxed on that item and all of them properly be taxed on the basis of surplus. To the extent of the reserve requied for the fulfillment of a company's obligations to its policy holders, the assets arc a trust fund which it were criminal to touch. The surplus .though, in a mutual company, belonging to the policy holders may be assessed without danger or injustice ; in a stock company where more or less of it may be claim- ed by holders of stock which never rendered service, the surplus not only may but should be taxed as vigorously as the inflated stock of a railroad company." Further evidence of dissatisfaction with the situation is found in the report of the State Assessors for 1874. The taxes paid by insurance companies they said were almost negligible as compared with their capital and their business. Comparatively few made the returns required by the tax law.'' Again in 1880 the assessors suggested that although the surplus of mutual insurance companies is likely to be largely invested in United States securities which cannot be taxed directly, yet it is within the power of the legislature to use the amount of the surplus as the measure of a franchise tax. The taxation of such com- panies, they held, should not be repressive, for the busi- ness of insurance should not be discouraged. They * New York Statutes, 1853, Chap. 469. ' New York Statutes, 185S, Chap. 83. 'New York Times, Apr. 8, 1879. ' Annual Report New York State Assessors, Senate Documents, 74, Vol. 1, No. 23. 80 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK thought it no more than fair, however, that the compan- ies should pay something to the state which created and protected them. They suggested a tax of one per cent or three-fourths of one per cent upon so much of the sur- plus as exceeded one year's income. The measure of a years income was to be the average income of the five years preceding.** In 1880 the legislature passed an act'^ taxing life insur- ance companies. This placed an annual tax upon the franchise or business of every life insurance company in- corporated under the laws of the state. The tax was to be paid before February i and was to be one per cent up- on the gross amount of premiums, interest, and other in- come, exclusive of rents, received by the company during the year ending with the preceding December 31, from persons residing in the state or from investments repre- sented by or based upon property situated within the state. Land and real estate were to be assessed locally, but the personalty and stock was to bear no tax. At the same sitting of the legislature, similar provision was made for other forms of insurance companies.^" Each of these companies was to pay a tax of four-fifths of one per cent upon the gross amount of premiums. This was not at first specified as a franchise tax, but the next year the leg- islature so defined it.^^ The tax on life insurance companies did not prove pro- ductive. Although it was not repealed until 1887^^ it ' Annual Report New York State Assessors, Senate Documents, 1880, Vol. 1, No. 26. ' New York Statutes, 1880, Chap. 534. Every company was to make a sworn statement to the state treasurer giving the total amount of premiums, interest or other income as was the basis of the tax. The refusal or neglect to make the report was declared a misdemeanor, and any one who wilfully made a false statement was to be subject to the penalties of perjury. Unpaid taxes were to be collected by action of the attorney general and the Supreme Court was given the power to restrain business through an injunction un- til the taxes were paid. In the case of other companies ten per cent was to be added to the tax if the report was not made within thirty days of the specified time. " New York Statutes, 1880, Chap. 542. "New York Statutes, 1881, Chap. 361. " New York Statutes, 1887, Chap. 699. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 81 was ineffective, because it lacked a provision stating its purpose. In 1886 the Court of appeals held^^ that the constitutional provision prohibiting a tax unless its pur- pose were specially stated did not apply to special taxes. This made the law valid and the companies liable for all the taxes which had accrued under it. The Comptroller asked for a law which would require a payment of only a part of the taxes due under the law of 1880^* but the law of 1887 repealing this also released the companies from liability for these back taxes. Hence life insurance companies were paying practically nothing directly to the state during this period. Some modifications were made in 1886 in the taxation of fire and marine insurance companies.^-'' They were required to make annual instead of semi-annual returns and the tax, which was expressly stated to be a tax upon corporate franchise or business, was to be one-half of one per cent of the gross amount of premiums received dur- ing the year. In 1905^^ this was raised to one per cent on the amount of premiums and life insurance compan- ies were put upon the same basis. By this law foreign and domestic companies are treated alike except for fees and retaliatory taxes. ^'' Alien companies, however, are required to pay only one half of one per cent upon prem- iums. When insurance companies were taxed like other cor- porations it was often difficult to determine just what was to be considered as capital and surplus. A large amount of litigation developed, and in almost every case the de- cisions of the court followed the contentions of the state. A fire insurance company sought to escape taxation on the amount of money received for unexpired fire policies. "Cited as authority, People vs Supervisors, 17 N. Y., 239. "Annual Report of State Comptroller, Senate Documents, 1887, No. 48. " New York Statutes, 1886, Chap. 679. " New York Statutes, 1905. Chap. 94. "Retalitory taxes aim to get even with other states imposing taxes on New York insurance companies. The law states that New York will impose as high taxes on the companies of any state doing business within the state as are imposed against New York com- panies in that state. 82 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK The court held/^ however, that so much of this as was in excess of a sum sufficient to cover the contingent Ha- bihty of the company was to be counted as surplus. One company sought to evade taxation by issuing scrip to the pohcy holders and retaining the fund. The court held that this was properly included in the assessment of the company.18 Neither would the court sanction the idea that the surrender value of policies constituted a debt which should be deducted,^" or that the shares should be assessed at the rate at which they sold in the open market during the year.^^ A number of other cases came up but 410. these suffice to show the way in which the nature of the business of insurance enhanced the difficulties of reaching a proper assessment. The consensus of the court decis- ions was that all the assets of the company over and above the contingent liabilities were to be taken as the proper basis for assessment. So far as clearness and ease of ad- ministration are concerned, the present system is much better. To what extent insurance companies, and life insur- ance companies, in particular, should be taxed or whether they should be taxed at all, are questions upon which there is great variance of opinion.^^ New York legisla- tors have pursued a more lenient course than has often been advocated. It is often contended that insurance companies should be taxed only very lightly, if at all, since the burden falls upon the policy holder. When a tax is placed upon a fire insurance company it must mean, in general, a higher premium, to the insured and in many cases a still further shifting until the incidence is upon "Insurance Company vs Commissioner of Taxes, 76 N. Y., 64. ^'American Fire Insurance vs Commissioner of Taxes, 91 N. Y., 670. " Insurance Company vs Davenport, 91 N. Y., 574. " Knickerbocker Fire Insurance Company vs Coleman, 44 Hun, " For discussion of insurance taxation see : State and Local Taxation, 1907, 1909 ; paper by F. L. Hoffman, National Conference on Taxation, Buffalo, 1901 ; Yale Readings in Life Insurance by Zartman; Life Insurance and Other Subjects by Dryden; Reports of special tax commissions of various states, especially Virginia, Nebraska, and Wisconsin, give discussions on insurance taxation. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 83 the consumer in the form of higher prices for the goods that he buys. Much the same objections are made to taxes upon hfe insurance companies. Life insurance, it is contended, is an institution which makes for the pubHc welfare, and the decrease of the burdens of government in providing for many people who might otherwise be dependents. This general point of view has been well expressed by the Independent.^^ A tax on any interest of any life insurance policy holder is in- defensive. It closely approximates a tribute laid upon a cemetery lot. To the vast majority of men a life insurance premium is a sacrifice ; in varying degrees it represents extra eflfort or self-denial It is a burdent upon which the unwisdom of legislation lays another burden. This mistake is due to ignorance — to a confusion of ideas. Men are often misled by names, missing the nature of the things the names represent. It is fairly probable that life insurance ac- cumulations would be exempted from taxation if from the begin- ning they had been called burial funds or widows and orphans or old age pension funds. That is exactly what they are. There is prevalent, even among policy holders, an erroneous idea respecting the nature of the vast accumulations held by the combined com- panies. They carelessly look upon them as vast accumulations of surplus wealth. This comes from the fact that they are concen- trated and the amount is exceedingly large, and yet in the usual meaning of the terms they are neither wealth nor surplus. They are every dollar of them, expense funds, small contributions of hard earned money saved up against the time when the universal enemy shall desolate the households of the contributors. Not a penny of the money dedicated to such use should be seized by the government. This is not wholly an inaccurate picture of the nature of the life insurance business. Yet it is greatly exaggerated. By no means are all premiums paid by those to whom such payment is a heavy burden nor is it always done for "burial funds." This is true at best only of industrial insurance. Many persons use the insurance policy as an investment or savings device upon which the reflected tax in an increased premium would not be a material bur- den. 2* The opponents of life insurance taxation follow the line of argument that has been indicated. The beneficent "Independent, May 8, 1913, Vol. 74. '^ That a tax is shifted to the policy holder is generally recognized. It is a cost of insurance. In participating companies it is reflected in lower dividends while in non-participating companies the prem- iums are higher than they would otherwise need to be. 84 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK features of the system are extolled; the provision for widows and orphans is emphasized ;the burden lifted from the state in the care of dependents is magnified. Life in- surance is pictured as a provision for the future — an in- centive to providence and thrift. The assets of the com- panies are but the accumulated savings of the policy hold- ers. A tax upon life insurance, then, they claim, is a tax upon savings, a penalty upon thrift and falls where it is particularly burdensome. This is not merely unjust but it has the further ill effect of diminishing the volume of life insurance. If we carry this argument to its logical conclusion it would condemn a large part of the present general sys- tem of taxation. "Taxes upon life insurance are upon thrift and savings." But the general property tax is pre- cisely such a tax. Men make provision for the future by accumulating savings and capital and are penalized for doing this by a tax. One may put his savings into a house, another may take out an insurance policy. It is hard to see enough difference between the two classes to afford a basis for discrimination between them in the matter of taxation. A tax upon insurance is not a unique tax ; it is logically a part of the general scheme which we have adopted. The contentions of its oppon- ents, carried their logical conclusion, would leave as the basis for our taxes only those social values which have no connection with individual savings. In regard to this tax upon savings and thrift. Professor T. S. .'\dams says : It is perfectly true that a tax on in-iiirancc paid by the pohcy holfler tends to discourage thrift. But that is not in itself sufficient reason for abolishing such taxes. In the first place, our tax system similorly discourages thrift at many points ; savings banks are taxed in most states ; and the small homesteads in w hich wage-earners and salaried clerks invent their savings are more heavily taxed in all probabilit.\- than any other das'; of property except the estates or widowed and orphaned children in the process of administration and settlement. In fact, our whole s\ stem of state t:ixation, falling prin- cipally on realized or accumulated wealth, i-^ a huge engine for the taxation of savings and capital— the two principal means by whicTi thrifty people provide against future emergencies. An insurance is merely a method of co-operative saving with an ingenious provis- ion that if any co-operator is prevented by death from continuing his saving, the more fortunate surivors shall do a stipulated amount of saving for him. Furthermore, this .system of taxing savings. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 85 and accumulated wealth has been delberately adopted and will not be abandoned. The civilized nations of the world have committed themseles to the general policy of levying taxes, so far as possible, in proportion to ability, not disability; according to strength, not weakness ; and as the thrifty man is usually the able and strong man, he will continue to pay most of the taxes. . The sim- ple truth is that no instrument of social reform is in general more ineffective, more disappointing or more illusory than taxation. Every tax has some incident or collaterial social effect. This truth furnishes sufficient reason perhaps, why we should temper or shade the general rule here or there. But it proides no justification for the essential modification of the general rule.'" Another objection to life insurance taxation is voiced in the old cry of "double taxation." The assets of the insurance companies are securities — mere evidences of ownership. The property which they represent is already taxed to the corporaton which issued them and should not be taxed to the insurance company. We have noted elsewhere that "double taxation" is not in itself neces- sarily an evil, but is only such when it leads to an unjust distribution of the aggregate burden of taxation. Whether securities as a whole should be exempt from taxation is one question ; how we are going to tax insur- ance companies, if at all, under the existing system of tax- ation is quite a different queston. The majority of states have not seen fit to exempt from taxation, securities in the hands of individuals. There seems to be no reason for exempting a company which makes similar invest- ments. In fact it merely acts as middleman for the in- vestor. It seems rather absurb to say to a man, "If you invest $5000 in bonds we will tax you upon it, but if you let the insurance company invest it for you we will not tax you." If a remedy is needed here it is not in insur- ance taxation but in the general scheme. Even if we grant that life insurance should be fostered by minimizing the burdens placed upon it, we cannot go so far as to justify an entire exemption from payments to the state. If life insurance companies are to serve their purpose, their solvency must at all times be absolutely assured. Experience has shown that this necessitates thorough-going state regulation. New York has main- ^ Address before the fourth annual meeting of the Association of Life Insurance Presidents, Chicago, 1910. 86 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK tained an insurance department for this purpose since 1857. Such a department, however, should go further than merely to certify that companies are solvent. It should guarantee that the premiums charged are no high- er than are reasonably necessary to properly carry on the business. When the state certifies to the solvency of a company and the reasonableness of its premiums, it is performing a special service for particular individuals — the policy holders and their beneficiaries — and it is but just that they should bear the expense. Taking into account both the nature of insurance busi- ness and our present system of taxation, we cannot grant the contention that the treatment of life insurance com- panies should be especially lenient. The problem is to hit upon some from of taxation which will be equitable fis between insurance and other forms of investment. The difficulties are increased because of the fact that indi\'id- ual companies do business in so many different states and because of the various forms of insurance companies. The length of time a company has been in existence is another factor which must be considered. We must also avoid eroneous premises upon which arguments for the taxation of insurance companies are sometimes based. Premiums are sometimes called "income," which is no more accurate than to call the deposits in a bank its in- come. Then it is often thought that the "dividends" to policy holders are a measure of the profitableness of an insurance business. These are not comparable to divi- dends paid by an ordinary business corporation to its stockholders, but are merely a return of part of the prem- ium, wliich, for the sake of absolute safety, has been larg- er than really necessarv. The "cash surrender value" feature of most modern insurance policies would in itself seem to make them a legitimate part of the basis of the present system of tax- es. Like a bank deposit, this is a demand right to money. The fact that the surrender value is less than the aggre- gate amount of premiums paid in makes no essential dif- ference. The risk that the company has carried has been INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 87 paid for by the difference between the surrender value and the premiums paid. The tax which is now most generally used by the states is a percentage tax upon gross premiums. In New York it is one per cent, which is lower than in most states. Be- cause of its general use and the firm grasp of some sort of taxation upon insurance companies, some insurance officials ha\'e asked that the one per cent rate upon prem- iums be made the uniform rate everywhere. The premium tax is, however, open to some valid ob- jections. Professor Zartmah has urged^' that such a tax discriminates among policy holders of different states, among holders of different kinds of policies, and among policy holders and other tax payers. The first discrimina- tion results from the premiums employed ; the second, from different premiums paid on different kinds of poli- cies; and the third form from the fact that the rate on premiums does not fluctuate with the rate on other prop- erty. Because of these difficulties Professor Zartman would give up the premium basis. Any increase in the premium to meet a new tax would work injustice upon future policy holders. The present policy holder has contracted for a fixed premium, and it is only the new policy holder who can be made to pay the tax. This is particularly applicable to stock companies, for in partici- pating companies the tax could be met from reduced dividends. This objection, of course, is not peculiar to msurance taxation but applies equally to many sorts of "new taxes." While the premium tax does work these discriminations, yet it is easily assessed and collected and unless some more just scheme be devised it should not be thrown aside. No scheme has been devised which mets the theoret- ical and practical tests of justice. The regulatory ex- penses can be met by fees and shifted to the policy hold- ers through higher premiums. If New York's personal property tax were other than farcical, a system might be worked out on the basis of the equity of the policy ■' Address before the second annual meeting of Life Insurance Presidents, New York, 1908. 88 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK holder represented by the cash surrender value. Should the state adopt an income basis for taxes, it would be comparatively easy to secure franchise taxes by assessing the company's income. The federal tax law has decided what shall constitute the income of insurance companies, and this basis could be used for state purposes. Here the large investments of older companies representing the equity of a large number of paid up policies would con- tinue to be taxed, while under the present system the heavier burdens fall upon the newer companies. Under a general income tax, dividends paid to policy holders and the amount received by the beneficiary in excess of premiums paid could be taxed to the recipient as a part of his income. So long as the present general tax system remains, however, the tax on premiums may serve as well as any other. TAXATION OF MANUFACTURING CORPORATIONS^^ We have seen that in i8i7the policy of using the tax sys- tem to encourage manufacturing interests in the state was adopted. In some form or other this policy has been pretty generally followed although not to the full extent that its advocates have urged. This was shown, for example, in the agitation for tax reform in the se\enties. The New York Times held that the exemption of personal property from taxation in England, France, and Holland was an encouragement to industry in those countries. In this country Maine and Vermont exempted manufac- turing capital from taxation. Most of the states, howev- er. New York included, burdened industry with local taxes. This was held to be a disadvantage in competi- tion with foreign producers.^® In his proposals for tax reform presented before the committee of ways and means, October 6, 1874, Mr. George H. Andrews pro- posed to exempt the shares of all maufacturing corpor- " There is no logical reason except that of convenience why in- surance companies and manufacturing corporations should be treat- ed in the same chapter. The only point of similarity is that both are exempt from the franchise tax on capital. "New York Times, Feb. 17, 1871. Editorial. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 89 ations carrying on manufacturing within the state. If for no other reason, he says, the fact that such is the prac- tice in some other states would be sufficient. In the revision of the tax laws in 1880,*" "manufac- turing companies carrying on manufacturing in the state" were exempted from the annual franchise tax. In con- struing this provision the courts held^'^ that it was not limited to companies organized under the general manu- facturing act, but included all companies under whatever law incorporated, whose principal business was manu- facturing. The law was applicable to foreign as well as domestic corporations, but where a foreign company only did some incidental work in connection with its manufac- tured products sent here to fit them for the market it could not claim exemption from taxation under the law.^^ The obvious difficulty in regard to companies only a part of whose capital was employed in manufacturing was reme- died by the law of 1889.^* This limited the exemption to corporations whose business in New York was exclu- sively manufacturing. If a company was not wholly en- gaged in manufacturing but was also engaged in selling in a city within the state goods manufactured by it out of the state and also of selling articles not of its own man- ufacture, it was subject to the tax.^^ It still remained difficult, however, to determine in particular cases wheth- er a company was engaged in "manufacturing." At the request of the Comptroller^^ -the law was amend- ed in 1896^* so as to exempt that part of the capital of domestic and foreign manufacturing corporations which was employed in manufacturing, thus putting for- eign and domestic companies on an equal footing. It did not however remove the difficulty in deciding what the term "manufacturing" included. Companies engag- '" New York Statutes, 1880, Chap. 242. " Gas Light Company vs Brooklyn, 89 N. Y., 409. " People vs Wemple, 138 N. Y., 582. " New York Statutes, 1889, Chap. 353. " Western Electric Company vs Campbell, 145 N. Y., 587. " Annual Report of New York State Comptroller, 1896. " New York Statutes, 1896, Chap. 908. 90 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK ed in both manufacturing and merchandising were ex- empt from tax upon the amount of capital employed ni the former use but not in the latter. How were the offi- cials to decide how much was invested in each? The court opinions were apparently conflicting. A law of 1901,^^ however, makes it necessary that at least forty per cent of the capital stock of corporations be invested in property within the state and be used by it in manufactur- mg business if the company is to be exempt from the an- nual franchise tax on capital stock. A similar provision applies to mining and laundry companies. This simpli- fies the administrative problem by introducing an arbi- trary rule. So long as the organization tax was one- eighth of one per cent a large number of manufacturing companies whose entire business was in New York were chartered in other states. In 1900, the Comptroller re- ported that 450 such corporations had been formed during the preceding year under the laws of a sister state. The ag- gregate capitalization of these companies was $250,000,- 000.'*' Even though manufacturing capital be exempt from the annual franchise tax it is still assessable locally under the law of 1857, providing for taxation of property. When we say that the local officials assess this, we have said enough to condemn the system. If uniformity is needed in any class of taxation it is in the class of manu- facturing concerns since theirs is a competiti^'e business, and the tax may mean the margin which will spell suc- cess or failure. Then we have all come to know that capi- tal stock, even if it could be properly assessed, does not represent the value of a business. Some companies are doing a large business on a comparati\'ely small issue of "New York Statutes, 1901, Chap. 558. " Annual Report of New York State Comptroller, 1900. A large amount of condemnation has continually arisen from state officials and the press concerning "driving capital out of the state." In this particular case the capital was employed entirely within the state which, after all, is the important item. Had it not been manufac- turing capital, it would have been taxed. Whether "driving capital from the state," when the industry or business is located here, means anything from the standpoint of taxation depends upon the similar- ity of the laws taxing foreign and domestic companies. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 91 capital stock while in others the capital stock may be to a large extent "water." The latter is especially true in large combinations. There are approximately sixteen hundred assessing districts in the state, and there is no uniform role to insure equitable assessments of such prop- erty. Even if absolute honesty existed among the assess- ors the magnitude and complexity of the problem would forbid its accomplishment. The officials, however, have often been accused of deliberate discriminations. It has been contended that in some cases capital has been driven away or invited to localities because the assessors either enforced or did not enforce the law. We are well aware that districts often offer incentives to industries, such as tree factory sites, etc., and it is not unreasonable to suppose that when they have it within their power, they try to offer advantages in respect to taxation. It is certain that in the local assessment of manufacturing corporations gross inequality still exists. There is no good reason why manufacturing companies should not bear their share of the public burden. No longer can they be generally considered as infant indus- tries that need the fostering hand of the state. The men who put their capital into such industries have no more claim to exemption than those in other enterprises. The argument that the tax is shifted to the consumer in higher prices is no more applicable here than in the case of man}- other taxes. The problem of taxing manufacturing com- panies is the problem of taxing capital in general in a just and equitable manner. The system should be such that there will be no discrimination in favor of particular fields of business endeavor. Because of the nature of the manufacturing business and the extended market for manufactured products, uniformity should not be confin- ed to the limits of any one state but should be extended, so far as possible, to the whole competitive district. It has been recently contended that the New York sys- tem of taxation tends to drive capital from the state or at least ofifers little inducement for it to enter. In resolu- ions adopted March 30, 1910 by the Rochester Conference on Taxation figures were cited to show that, from 1900 92 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK to 19 1 o, capital invested in manufacturing in New York had increased much more slowly than in Pennsylvania. The proportionate increase of the value of manufactured goods, wage earners and the amount of horsepower de- veloped were similar. The conclusions, however, were based upon census statistics, the accuracy of which may be questioned. The resolutions asked that a committee be formed to further legislation to relieve manufacturing companies. In 1910 the New York Board of Trade and Transportation asked that something be done to remedy the situation. In his message of 191 2 Governor Dix ex- pressed his regrets that New York was losing her place as a manufacturing state because of the burdens of tax- ation. He asked for reform and suggested the federal income tax method as worth considering.^® Differences in the tax system of New York and other states may have had some influence in determining the growth of manufactures. It is certain, however, that too much importance has been attached to this idea. There are many other and more important factors in the situa- tion. Only under the rare conditions that the other influ- ences are practically negligible will taxation be a deter- mining factor. If there were a more rapid growth of manufacturing in Pennsylvania it can doubtless be ascrib- ed to other influences than taxation. Dififerent methods of taxing this class of corporations have been suggested. Some have asked for a uniform rate upon capital stock graduated by the amount of divi- dends paid. In 1910 a bill to impose a tax of one-eighth of a mill upon the issued capital stock for each one per cent of dividends paid was reported favorably in the Sen- ate but failed to pass. The main objection was that the dividends would be covered up by high salaries in closed corporations and in others by creating a surplus. Even if this difficulty could be eliminated by charging salaries over a certain amount, together with annual surplus ac- cruals, to dividends,, such a tax would not always be " Message of Governor Dix, Assembly Documents, 1912, Vol 1, No. 2. The income tax to which he referred has been absorbed by the general federal income tax. INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 93 equitable because of differences in capitalization policies. The problems of taxing manufacturing corporations is but a part of the problem of securing a just and equitable general tax system. There are no longer, if there ever were, reasons why manufacturing corporations should constitute a special class for purposes of taxation. The scheme that may be chosen as just and equitable for cap- ital in general should include capital engaged in manu- facturing enterprises. CHAP T ER VI. TAXATION OF BANKS In New York, as elsewhere, the taxation of banks by the state has been compHcated because of the require- ments of federal statutes. On this account a large num- ber of important bank cases have been before the courts. Bank stock was subject to taxation under the provisions of the first special statute relating to the taxation of corporations.' Bank officers were required to give to the assessors a statement of real estate, capital stock paid in or secured to be paid in, and the assessors were to put the amount of such real and personal property upon their rolls. The cashier or treasurer was to pay the tax and deduct the amount from the dividends of stockholders in proportion to the amount of stock held by them. As in the case of other corporations, none was to be deducted from dividends due to the state or to charitable institu- tions. Any complaints which arose were taken directly to the legislature. Thus, in 1828 the Commercial Bank of Albany applied to the legislature to have its assessments of $300,000 re- duced to $150,000. This request was granted.^ The safety fund system was adopted in 1829, and under this it was necessary that all bank capital be fully paid in. Banks were then taxed upon the amount of their capital 1 except so much as was held by the state or charitable institutions). The tax was upon its nominal value, even though, of course, its shares might be above or below that value.* » New York Statutes, 1823, Chap. 262. ' New York Statutes, 1828, Chap. 50. ' So held in Bank of Utica vs City of Utica, 4 Paige, 399. 94 THE TAXATION OF BANKS 95 The banking act of 1838"' did not state whether banks were to be considered corporations. It remained for the courts to decide that the institutions estabHshed under the act were corporations, and that they were liable to be tax- ed like other moneyed institutions.^ Some individuals continued to escape on the ground that they were not cor- porations. In 1847® the legislature remedied this by pro- viding that all individuals doing a banking business should be subject to tax on the full amount of capital stock. The tax was to be upon the actual market value as estimated by the comptroller, without deduction for the debts of such banker. In 1 851'' the banking department was established, the expense of which was to be paid by the incorporated banks in such proportion as the superintendent thought just and reasonable. If, however, any special services were performed for a bank, the expense was to be borne by the bank for which the service was rendered. In his report to the legislature in 1853* the Comp- troller pointed out that the bank surplus was practically the same as capital, and asked that it be taxed in the same way. In that year the general corporation tax law® was passed which made surplus profits or reserve funds in excess of ten per cent of the capitl subject to taxation. Since the banking associations were corporations, their surplus, in excess of ten per cent of the capital, was tax- able. In 1863, moreover, a law was put upon the statute books which expressly mentioned banks and banking as- sociations as subject to this tax.^" The most radical change in the taxation of banks came in 1865. This was necessary in order to conform to the * New York Statutes, 1838, Chap. 260. ° Thomas vs Dakin, 22 Wendell, 9 and Bank of Watertown vs Assessors, 25 Wendell, 686. ' New York Statutes, 1847, Chap. 419. ' New York Statutes, 1851, Chap. 164. ' Annual Report State Comptroller, 1853. ' New York Statutes, 1853, Chap. 654. "New York Statutes, 1863, Chap. 240. 96 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK National Banking Act of 1864,^^ which imposed limita- tions upon the powers of states to tax national banks. The New York statute of 1865^^ was a general law, enabling banks to become associations for the purpose of banking under the laws of the United States. With re- spect to taxation^^ it provided that shares in any of the banking associations organized under the act or the fed- eral statute were to be included in the valuation of the personal property of the owner, and assessed in the town or ward where the banking association was located. Moreover, it was to be assessed at no greater rate than other moneyed capital in the hands of individuals. The tax was not to exceed the par value of the stock, while the real estate of the bank was to be subject to local tax- ation. Unless the taxes were otherwise paid, the bank was to withhold them from dividends. Under such provisions, then, national banks began to be taxed. Their shares were assessed and taxed to the individual owners while the capital and surplus of the state banks were assessed to the bank. The first impor- tant question which arose was whether bank capital in- vested in United States securities should be deducted from the assessment. This was the issue in a number of "U. S. Statutes at Large, 1864, Chap. 106. It provided, (section 41), that nothing in the act was to be construed to prevent all the shares in any of the said associations [National Banks], held by any person or body corporate, from being included in the valuation of the personal property of such person or corporation in the assess- ment of taxes imposed by any state authority at the place where the bank was located. Such assessment and tax was not to be at a greater rate than was assessed upon other moneyed capital in the hands of individual citizens of such state. It was further provided that the tax so imposed under the laws of any state upon the shares of any of the associations authorized l)y the act was not to exceed the rate imposed upon any of the shares in any of the banks or- ganized under authority of the state where such association was located. It further provided that nothing in the act was to exempt the real estate of such associations from either state, county or municipal taxes to the same extent, according to value, as other real estate was taxed. " New York Statutes, 1865, Chap. 97. "Sections 10 and 11 of the above law. THE TAXATION OF BANKS 97 cases which came before the courts.^'' and the decisions were always against the banks. The point was finally settled by the United States Supreme Court in a case car- ried from the Court of Appeals. ^^ The finding was that shares of banking associations formed by the act of 1864 were subject to taxation by states without regard to the fact that a part or a whole of the capital was invesed in national securities. Chief Justice Chase with two other justices dissented, however, in the following language : "We think such taxation is actual, though indirect tax- ation of the bonds; and that taxation of the shares of national banking associations without reference to the amount of capital invested in national securities, is not authorized by congress." These same justices dissented in the case of Dyer vs Commissioner of Taxes}^ Here the shareholder object- "The case of the City of Uiica vs Churchhill (43 Barbour, SSO) was one of the first to come before the courts. The court held that a tax on the stockholder for the stock held by him was a proper and legitimate source for state and municipal taxation, A tax upon the stockholder was not to be considered a tax upon the bank nor on its property, but upon property held and owned by the stockhold- ers and in which the bank had no interest. In this case the court held that the laws of the state and not the laws of congress were to furnish the guide by which to decide whether the stocks of national banks can be taxed, and the place and manner of taxing them. The basis for this was that national bank shares were per- sonal property' and therefore assessable under New York laws. The court did not think they could be assessed in a ward where the bank was located when residence was elsewhere. In the next session the court took the opposite view (People vs Assessors, 44 Barbour, 148) ) by holding that congress had the power to modify the taxa- tion of national bank shares, and provide under what circumstances it should be execised. The amount of the stock invested in United States securities was not to be deducted. When carried to the Court of Appeals this view was upheld. " Van Allen vs Assessors, 33 N. Y., 161, 70 U. S., 573. In the case of Bank of Commerce vs Commissioner of Taxes (69 U. S., 200) appealed from the Court of Appeals (26 N. Y., 163) the court held that a tax laid by a state on banks on a valuation equal to the amount of the capital stock paid in or secured to be paid in, was a tax on the property of the institution. When that property con- sisted of stocks of the Federal Government, the law laying the tax was void. The only difference in the two cases was that one was the assessment upon the capital to the bank, and the other the as- sessment upon shares to the owner. "4 Wall., 244. 98 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK ed to the tax because insurance companies were assessed at a mucii lower rate, or, what amounted to the same thing, were assessed only on the part of capital stock left after deduction of the amount invested in United States bonds. The dissenting opinion held that a similar de- duction should be made in the case of bank shares. The majority of the court held, however, that the clause in question did not refer to the rate of assessment upon in- surance companies as a test by which to prevent discrim- ination against the shares; that is, one criterion was the rate of assessment upon moneyed capital in the hands of individuals.^^ While in the Van Allen case the contention of the state courts was upheld, the law of 1865 was, neverthe- less, declared unconstitutional. This was upon the ground that it did not provide that the tax imposed should not exceed the rate imposed upon any bank or- ganized by the state. There was no tax laid on bank shares though there was a tax on capital. This led to the passage of the act of April 23, 1866,'* which provided that thereafter no tax should be assesse- ed upon the capital of any bank, but that stockholders should be assessed and taxed on the value of their shares. Otherwise the act was much like its predecessor. While this produced no change in the actual results, it met the technical requirements. In making the assessment there was to be deducted from the value of each share such a sum as was in the same proportion to its value as was the assessed value of the real estate to the whole value of the stock outstanding. Each banker was required to give under oath the amount of the capital invested in the bus- iness. The bank had to keep at all times in its office a full and correct list of names and residences of all the stockholders together with the number of shares held by each. Such lists were to be open to inspection during business hours, " It was not until later that the interpretation of "moneyed capi- tal in the hands of individuals" came before the court. See page 1 in for this case. "New York Statutes, 1866, Chap. 761. THE TAXATION OF BANKS 99 Such were the provisions of the law under which banks were to be taxed for the next several years. As the courts had held that investments in United States secur- ities could not be deducted, so they now further held that debts could not be deducted.^^ In giving this opinion the court said with regard to the law of 1866 : "These un- usual provisions and directions concur with the previous legislation in indicating the the statuatory intent to estab- lish for bank shares a system of taxation peculiar to it- self and independent of the general system of taxation existent in the state." Upon the point of taxing the value of shares it said : "It is as if they had said, we cannot now tax the national banks as we have been accustomed to do but instead thereof we will tax their share- holders and we will apply to them the system of taxation that we have hitherto imposed upon the banks, so far as it is lawful so to do." Here, then, we have the special system of taxation de- signed for the banks, and the interpretations made by the courts. The shares were to be assessed to the holders but at the place where the bank was located. Such as- sessment, however, was not to be at a higher rate than upon other moneyed capital in the hands of individuals. The amount of the stock invested in United States secur- ities and debts could not be deducted. We shall now examine how the policy was received by the banks and the general public, and what were the general effects. The decisions of the courts which we have just noted were doubtless a surprise to many. Before the cases came before the court, the Nezv York Tiines^° pointed out that the comptroller was making the singular experiment of assessing national bank capital at a higher rate than local bank capital. In doing this it suggested that he was ply- ing directly in the face of the National Banking Act and of course could not succeed. Letters from E. G. Spaulding, drafter of the National Currency Bank Bill " Cogger vs Dolan, 36 N. Y., 59. '^New York Times, July 15, 1865. 100 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK and the Legal Tender Act,^^ and Freeman Clark, Comp- troller of the National Currency were quoted at length in support of the view taken. Mr. Spaulding concluded that the shareholders of a national bank which has a part of its capital invested in United States securities were only liable to be taxed on the amount of their share in the capital stock remaining after the amount invested in such securities was deducted. If all the capital were so invested he thought the stockholder could not be tax- ed at all. A lengthy legal opinion by Ward Hunt, print- ed by the same journal, ^^ concluded : "Upon a careful consideration of the provision of the statutes, state and national, regulating the shares in national banks for the purpose of taxation, I am of the opinion that such valua- tion is to be ascertained by taking their actual value sub- ject to a reduction from the shares of each individual of a proportionable amount of the capital invested in United States securities." Taking these views as representative of a probably large body of opinion, we see that the find- ings of the courts must have laeen in some measure unex- pected.^^ " Mr. E. G. Spaulding was chairman of the Senate sub-committee which drafted the bill providing for the National Currency and the Sub. Treasury Act. Because of his influence in connection with the latter he has been called the "Father of the Greenbacks." ^ New York Times, Aug. 3, 1865. " These were the first bank cases which came before the Supreme Court. The first case deciding upon bond investments (69 U. S., 200) arose from the passing of the law of 1863 (Chap. 240). Un- der the law of 1857 the tax was upon the capital stock assessed at actual value. Here the court held that the amount invested in se- curities must be deducted. (2 Black, 220) The law of 1863 made the tax upon a Valualion equal to the amount of capital stock paid in or secured to be paid in. The court reasoned that a tax on such valualion was a tax on the property of the bank, and when that prop- erty consisted of stocks of the Federal government the tax was void. The other case came under the new law. (70 U. S., 573) Here the court argued that a tax on shares was not a tax on gov- ernment securities because the tax was the condition for the new rights and privileges conferred upon the associations. If Congress had the power to grant these then it was equally clear that it had power to annex conditions. The tax was not upon securities, but upon the rights and privileges conferred by the charter. Neither was the tax one upon the capital of the bank. The corporation was the legal owner of the property and could deal with the corporate THE TAXATION OF BANKS 101 The law required that the shares be assessed at their actual value, and the court held^* that stock assessed at par value when the market or actual value was more than this was erroneously assessed. Yet there were great ir- regularities in the assessment of the bank shares. Not only were these taxed differently from other property, but the ratio of assessed to true value varied greatly for different banks. The Comptroller, in his report for 1873, pointed out that the rule of "actual value" assessment was almost everywhere violated. No uniform practice was formed and the valuation was frequently at from twenty-five to eighty-five per cent of par value. ^^ Only a small proportion of the capital of private banks was as- sessed, the explanation usually given being that their cap- ital was invested in government bonds. The state assessors also condemned these inequalities. Not only were the assessments at variance with the act- ual values, but many different rates of taxes were im- posed. Two or three different rates in the same county were not unusual. Negligence of the taxing officials some- times went further than this. For example, a bank in one of the western counties with a capital of $200,000 went for several years without being taxed at all, and was finally assessed at one-third of par value. ^® Even if bank shares had been assessed according to law, inequality would still have existed as compared with other kinds of personal property. Since they were as- sessed where the bank was located, and the taxes collect- property as absolutely as a private individual could deal with his own. In no legal sense were the individual members the owners of the corporate property though they might be interested in it. In the decision dealing with the deduction of debts, (36 N. Y., 59) the reasoning dealt with the legislative interest. It was pointed out that in all previous laws banks were taxed without reference to the con- dition of the share owners. Where debts were intended to be de- ducted the laws specifically so stated. It was the legislative intent to tax banks under a different system from that of the general tax law, and the legislature did not intend that debts should be deducted. "People vs Assessors, 5 Thompson and Cook, 155. "Annual Report of New York State Comptroller, 1873. "Annual Report of New York State Assessors, Senate Docu- ments, 1874, Vol. 2, No. 23. 102 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK ed at the source, it was difficult for bank shares to easily escape taxation. Neither was it possible for banks arbi- trarily to designate as their "principal office" a locality where the taxing officials were especially lenient. It was the old question of the evasion of the personal property tax. Since much of the personal property was being assessed at a very small fraction of its "full and actual vakte," those banks which were heavily taxed had what seems a right to complain. Besides being thus taxed up- on capital the banks were taxed upon their whole surplus, which was not true in the case of other corporations. Governor Robinson condemned this practice as unsound since it induced the banks to divide their surplus among the stockholders thereb^' diminishing the security which it gave to the public so long as held by the bank.^'' Such a system could not be without its bad affects. Among the banks of New York City the reduction of cap- ital was a common practice, and along with this went the reduction of surplus. The report of the Commissioner of Taxes and Assessments of New York City for 1877 showed that the variation in the assessments upon the stockholders of banks was responsible for the failure of one bank with a capital of $100,000, the abandonment of business by two banks with capitals of $600,000 each, the reduction of capital by six banks to the extent of $3,950,000, and the establishment of one bank with a capital of $100,000. There had also been a large reduction of surplus on the part of several banks by distribution or by losses in bus- iness, pointed out the report. In January, 1877, the Bank of Commerce sent proxy forms to stockholders for the purpose of obtaining authority to reduce the capital of $10,000,000 to any amount not less than half of this un- less some legislative change was made in regard to tax- ation. This consent was given and the legislation was not forthcoming. The reduction of banking capital in New York City within a year amounted to almost $10,000,000. The taxes on the shareholders in the New York City banks " Governor Robinson's Message, 1877, Senate Documents, 1877, Vol. 1, No. 2. THE TAXATION OF BANKS 103 in 1876 were nearly $12,000,000 more than in 1875 while the tax on their real estate amounted to over $10,000,000. Under such conditions it is no wonder that capital would be reduced and surplus distributed if this would bring re- lief. It was possible to put the surplus where it could not be so easily found by the assessors. Even under a reduc- ed capital, if the profits remained as great as before, the value of the share should increase. If, then, the shares were taxed at their actual value, as was intended, a mere reduction of capital would have little effect upon tax. But the dividends and distributions of surplus were not always reflected in the value of the shares. Besides, there were wide discrepancies in the assessment and a re- duction in capital often meant lower tax. It was hard for an assessor to assess a bank with a capital of $50,000 as much as one with a capital of $500,000. The nature of the banking business makes a large capital of no great importance. If large deposits can be secured and exten- sive credit given on a small capital and surplus, the profits still remain. There is a disadvantage, however, to the public in that the security of the bank is weakened. In 1877 Mr. Elliott C. Cowdin championed a bill in the Assembly for the relief of the banks. In a speech on April II, 1877, he presented many facts which vividly portrayed the alleged condition of the New York banks. People are mistaken, he said, when they think national banks are the pets of the federal government and should, therefore, bear heavy taxes imposed by the state and mu- nicipal governments. He quoted the federal comptroller as declaring the tax upon national bank capital relative- ly higher than upon any other capital in the country. Not only must it bear state taxation, but a national tax as well.^^ The average rate of taxation on the capital of all the national banks of the state was slightly less than three per cent. A comparison of a few cities follows ; " National Banks by the law of 1863 were required to pay three kinds of taxes to the federal government: (1) one per cent an- nually upon the average amount of notes in circulation; (2) one half of one per cent upon deposits ; (3) they were required to keep a reserve of 25 per cent in city banks and 15 per cent in country banks. They could not use the reserve yet were taxed upon it. 1 04 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK New York, 3.1 per cent; Philadelphia, .5 per cent; Wash- ington, .3 per cent. Including federal taxes the rate in New York City went to 5.1 per cent while in Abany and Syracuse it was more than 6.5 per cent. Money was being loaned on call at this period at about three per cent while notes were discounted at from four to six per cent. A study of the values of personal property on the assess- ment rolls in New York city shows the national banks to be almost forty per cent of the whole. The speaker commented upon the difficulties of meet- ing the competition of foreign bankers who did not have to pay the tax, and upon the evils of reducing capital and surplus. The bill before the legislature sought to secure a more uniform taxation of banking capital as compared with other forms of capital. It met defeat, however, on April 26 by one vote. The opposition came chiefly from the rural districts. The New York Times^^ sought to excuse the rural legislator by saying the "he probably does not understand in the sense of realizing comprehension the severity and injustice of the present taxation ; he is accustomed to the complaint of inequality, and expects as a matter of course, that every class and every interest will endeavor to escape being taxed." Thus the system remained unchanged and the agita- tion against it continued. Comptrollers, state assessors, bank superintendents, and the press all condemned it. The assessors criticized the "vengeance" with which national banks were taxed, and expressed doubts as to wether any capital could bear such an enormous burden. The national banks were paying thirty per cent of all the taxes upon personal property.^" The Superintendent of Banks, in his reports for 1878 and 1879^^ was no less bit- ter. He emphasized that the banks were taxed upon what they had and upon what they did not have; upon what they owned and upon what they owed. " Editorial, New York Times, April 23, 1877. " Annual Report New York State Assessors, 1879. Senate Docu- ments, 1879, Vol. 2, No. 28. " Annual Report Superintendent of Banks, Assembly Documents 1878, Vol. 1, No. 5; 1879, Vol. 1. No. 5. THK TAXATION OF BANKS 105 The tax was a war tax, he said, and it should not be continued. As an evidence of the difficulties which sur- rounded the banking business, he pointed to the number of banks which had either gone out of business, reduced capital, or suspended dividends. When an excessive tax is being placed upon bank shares it does not fall upon the richest and strongest capitalists, for a large propor- tion of bank shares are held by minors, estates, etc. When banks are excessively taxed, therefore, these classes must bear more than their share of taxation. The State Assessors showed that there were three companies within the state which, if taxed as national banks were taxed, would pay all of the state tax. Such taxation, however, would be considered an outrage upon the rights of property and relief would no doubt be given by the courts.^^ That all this dissatisfaction was not merely a clamor stirred up by the banking interests and that real hard- ships were imposed upon the banking business, seems clear. It had not been the practice of the state comp- trollers, the state assessors or the bank superintendents unjustly to champion the cause of corporations. More frequently have they recommended measures which would bring more revenue to the state. But we find all these officers decrying the injustice to banks and the consequent evil effects upon business and industry. Branches of foreign banks could flourish and prosper besides the struggling national banks. But as soon as a bill passed both branches of the legislature to tax foreign banking capital to the same extent that domestic banks were taxed, the representatives of the Canadian banks immediately held a conference and took measures to with- draw their capital. This would have taken some thirty or forty million dollars from the loan market and the commercial public became so aroused and exerted such an influence that the bill was vetoed. Even such a lesson as this did not awaken the legislators to the situation with respect to home capital. That the capital and surplus in- " Annual Report New York State Assessors, Senate Documents, 1880, Vol. 1, No. 26. 106 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK vested in the banking business in New York state, especi- ally in New York city, actually decreased, and that this was not true of banking capital elsewhere is evident from a study of the Pennsylvania banks of the same period. The accompanying graphs make this clear. The capital of nb'i of Rochester, 37 N. Y., 365. "Bank for Savings vs Miller, 177 N. Y., 461. This rule is prac- tically the same as laid down in the statute (1892, Chap. 689) for determining the amount of surplus which a bank had. Its surplus could not exceed IS per cent of its deposits. "Bridgeport Savings Bank vs Barker, 154 N. Y., 128. THE TAXATION OF BANKS 119 More recently, however, an increasing number of writers on taxation are in favor of some form of taxation. The position of deposits in savings banks differs from that of deposits in commercial banks. Savings banks were es- tablished for the small depositor — for the one whose sav- ings are small, and the kind of business done by the bank is limited in many ways. While the importance of savings banks accounts is di- minishing,®" and the average per depositor is small, the total may aggregate many millions of dollars. Atttempts to tax deposits have been met with the objection that this is to tax the poor and industrious, the widows and or- phans. While the average deposit is small, yet quite a large number of wealthy men use the savings banks. The maximum individual deposit is $3000, but this has been evaded by the depositor using different banks or making his deposits under different names. The special commis- sion in 1907"! called attention to a case where, in admin- istering an estate in one of the interior counties, the court found deposits in every savings bank in the state between and including Buffalo and Albany. In another case an estate was appraised for the inheritance tax, and every cent of the $65,000 was found in savings banks. It fur- ther pointed out the large number of cases where de- posits have been made under different modifications of the same name and under the names of different members of the same family. By these methods, then, the purpose of the law, in fostering savings among the laboring class- es and the poor, has been abused. For this reason the taxation of savings accounts has been advocated. The commission to which we have just referred thought it best to make the maximum amount exempted from tax $1000. This might result, it thought, in limit- ing the deposits in any one bank by any one person to $1000 and hence virtually exempt all deposits from taxa- tion. Governor Dix, in his message of 19 12, pointed out "The decline in savings deposits can probably be accounted for by the spread of investment intelligence among individuals together with the increased ease of securing suitable securities. "Senate Documents, 1907, Vol. 5, No. 11. 120 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK the violation of the spirit of the law whereby millions of dollars sought the savings banks as an investment; and asked for some method of reaching this class of capital which would not burden the small depositor. It does not seem that fixing $1000 as a maximum tax- exempt deposit would accomplish the desired end. If persons use a number of banks and a number of different names under which to make deposits when the exemption is $3000 there is no reason to suppose that the practice would be stopped with a $1000 maximum even though it might be somewhat lessened. One would have to pat- ronize a few more banks or use a few more names, with evasion continuing much as before. We would not penalize small savings, but it is doubtful whether a moderate tax upon deposits would have this effect. Even if it should mean a lower rate of interest, it would work little hardship, since the tax would only amount to one or two dollars and this would be the only tax that many of the depositors would pay. The opposi- tion to such a tax has probably not come in large measure from the small depositor, but has been invoked in his name by those who have used the banks for larger invest- ment. The man whose motive is saving would not often be induced to give it up because of a small tax. Because, then, of the amount of deposits in the savings banks ($1,660,564,190.73 in iqi2), the negligible burden upon the small depositor and the development of the investment feature, there can be little reason for opposing a small tax upon sa\'ings bank deposits. Trust companies have also been treated differently from other banks. In 1874"" they were placed under the banking department, and were to be assessd their proper proportion of the expense of the department. By the law of 1901®* every trust company organized or authorized to do a trust business under general or special laws of the state was to pay an annual tax for state purposes. This tax is for the privilege of exercising its corporate fran- chise or carrying on its business in an organized capacity. "' Nijw York Statutes, 1874. Chap. 324. «=New York Statutes, 1901, Chap. 132. THE TAXATION OF BANKS 121 The tax is one per cent on capital stock, surplus and un- divided profits. This is in lieu of all other taxes, except the organization tax and the owners of the shares are not taxed upon them. Other banks are taxed in the same way, but in the case of trust companies, there are no fed- eral statutes to make confusion. Before this law was en- acted trust companies were lightly taxed and banks com- plained of the descrimination. Since they have been put on the same basis the banks are satisfied, and there has been very little complaint from the trust companies. As they are in direct competition with banks in many ways it is but just that they should be taxed in the same man- ner. CHAPTER VII TAXATION OF RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS Public service corporations furnish one of the most complex problems of taxation. This is due to dififerent causes. The legislature at an early date divided public utilities into classes each of which was taxed differently. This system still continues. The problem has been further complicated by Federal laws, and in the apportioning of state and local revenues. For many years the basis of public utility taxation was the general tax law. Concessions, we have pointed out, in the form of commutations and exemptions were made to turnpike companies and bridge companies. ^ Leniency was also shown to gas companies. In 1848 the state gave municipal authorities power to exempt any such company from taxation of personal property for a period not to ex- ceed three years from its organization.^ Not only was leniency shown to individuals and companies undertaking public utility enterprises, but the state itself undertook many projects. State activity was especially marked in building canals.^ These canals were a source of revenue, and railroad competition was at first looked upon with disfavor. A law enacted in 1848 stated than any road paralleling or nearly paralleling any canal of the state, and within thirty miles of it, would be considered as di- verting freight business from the canals. Because of this the same state tolls that would have been paid had the property been transported by canal were to be paid by the * Chapter I, p. 13. ' New York Statutes, 1848, Chap. 37. 'Don Sowers, Financial History of New York State (New York 1914) gives a good account of the expenditure of public funds. 122 RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 123 railroad.* After 1851, however, railroads were relieved from the duty of paying tolls. ^ The attempt to assess railroads under the general tax lawr soon led to litigation. The Mohawk and Hudson Railroad Company, in 1834, resented the attempt to tax all its capital as personal estate. In court the chancellor gave the opinion that a railroad was not to be assessed, as personal estate, upon the part of its capital invested in lands. In the same category with land he placed the rails and other fixtures of the system. Such property, he held, was to be taxed as real estate at its actual value, while capital stock not so invested was to be taxed as personal property at the location of the principal office.® This decision proved but a stepping stone to further difficul- ties. Real estate, it held, was to be assessed at actual value but it soon became apparent that actual value was a very indefinite term. Was the real esate to be consider- ed as isolated and assessed on the same basis as other property in the district, or was it to be taken as a part of the unified system ? In assessing one road the assessors estimated the value of the entire road, taking into con- sideration not only the physical property but earnings as well. The value for the district was then determined by taking such proportion of this entire valuation as the length of road in the district bore to the entire length. The value for the district, by this method, amounted to about $250,000, whereas the value of the local property, taken by itself, was found to be about $60,000. The Supreme Court upheld the company in their refusal to accept the assessment. The real estate of a railroad com- pany, it held, could not be viewed as a part of a unified system, but must be assessed in each district as the actual value of that part found within the district. No account ' New York Statutes, 1848, Chap. 140. This law followed others of a similar nature which affected only particular companies. The same provision was incorporated in the act of 18S0 which governed railroad incorporation. Heavy penalties were attached for refusal to pay tolls. ° New York Statutes, 1851, Chap. 497. ' Mohawk and Hudson River Railroad Company vs Chute, 4 Paige 384. 124 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK was to be taken of income or general profitableness. The method of appraisal was to be the same as that used for assessing adjacent lands owned by individuals.'' This decision, given in 1851, was followed in 1853 by the Comptroller's recommendations relating to railroad property. He held that a railroad was nothing more nor less than a farm, cultivated and used for its particular objects instead of raising grain and rearing stock. It was real estate to be assessed simply as such.* The Com- troller, in his report for the preceding year, had advanced the opinion that neither capital stock nor actual cost would be a measure of value. Neither did he consider the dis- trict assessors capable of ascertaining the value of rail- road property. He suggested that such assessment might be better made by county or even state officials, and the value distributed to local districts in proportion to road mileage.® The questions upon which this litigation was based were soon settled by statute. In 1857 a law was enact- ed^" which removed railroads from the scope of the gen- eral tax system, and which formulated a scheme for tax- ing such corporations as a separate class. The real estate of railroads was to be assessed locally in the same manner as the real estate of individuals. Personal property was to be assessed by the assessors in the district where the principal office was located, but the proceeds of this tax were to be paid by the companies to the collectors of the several localities through which the road passed. The pay- ment was to be in proportion to mileage. For the pur- pose of arriving at the assessment, every railroad com- pany was required to make an annual report to the as- sessors of each district in which they owned property. The report was to specify the land owned by the com- pany, ^^ the length, cost, present value and percentage 'Albany and Schenectady Railroad vs Osbont, 12 Brbour, 223. ' Annual Report of New York State Comptroller, Assembly Docu- ments 1853, Vol. 1, N 1. 5. ° Annual Report of New York State Comptroller, Assembly Docu- ments 18S2, Vol. 1, No. 10. " New York Statutes, 18S7, Chap. 536. " In giving the amount of land the companies were to deduct the RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 125 depreciation of the superstructure, and the value of build- ings belonging to the company. Such a list was to be taken as prima facie evidence of value unless fraud were suspected by the assessors. Whenever the correctness of the report was questioned evidence could be taken under oath as to its completeness and the valuation of the prop- erty listed therein. In no case could the valuation be made less than that found in the report of the company. This was the first attempt by the legislature to solve the valuation problem. The method was self-assessment with revision by the assssors. The procedure was merely an attempt to administer the general property tax. That the system was defective is evident because there was no adequate supervision of the assessment, and no assurance that the reports made by the companies were accurate. It was, however, enough of a departure from ordinary methods to be viewed with misgivings by state officials. ^^ The administrative features were somewhat modified in 1870, but not so as to affect its general nature.'* In practice the assessment of railroad property was left pretty much to the local assessor and gross inequal- areas used in crossing Tiighways. If the report was more than thirty days late a penalty of two hundred and fifty dollars was attached. This was to be collected by the assessors and used for the benefit of the poor. "The Comptroller, in his report for 1858, (Assembly Documents, Vol. 1, No. 5) attacks the law as being unjust. He criticizes the at- tempt to get valuations from company reports and asks that the law be revised so as to assess railroad property in the same manner as other property. The law was not, however, strictly applied in all cases. Exemptions from taxation were sometimes granted for specific reasons. For example, in 1866 (Chap. 546) the Pough- keepsie and Eastern Railroad was exempted from the taxes upon real estate, personal property and capital stuck until a single track had been completed. The period of exemption, however, was not to exceed ten years. " New York Statutes. 1870, Chap. 506. Provision was made by which the tax could be paid to the county treasurer. If this were done a fee of one per cent of the tax was attached. If the tax were not paid within thirty days the district collectors proceeded to col- lect the tax together with a five per cent fee. The taxes paid to the county treasurer were credited to the districts by which they were assessed. Should this amount to more than what would naturally be paid to the county by the district the difference would be paid by the county to the district. 126 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK ities resulted. The Special Tax Commission/* in their report made in 1871, describe the working of the system as follows : The System of taxing railroads in the state of New York is as imperfect and objectionable as it well can be. The road beds and the real estate of the companies are valued and assessed in the different towns through which the line of the road extends, accord- ing to no uniform standard, but at the discretion or rather caprice, of the local assessors, from whose decisions there is practically no appeal. In some towns the standard of valuation of the prop- erty is reported to depend on the amount annually required to de- fray the highway expenditures ; and in another instance the erec- tion of an expensive bridge over a navigable stream was regarded by one of the towns, on whose territory the bridge abuts, as a suffi- cient warrant for the erection of a new school house. In one town, where a company had substituted an expensive station house for a dilapidated one to the great benefit of the town, the erection of the building was immediately made the occasion of a large increase in the taxation to which the company was subjected. The effect of this was that the company concluded not to repeat the building of any more expensive station houses along their line, but would get along with cheapest buildings possible ; or in other words the action of one town in respect to taxation, was made to result in detriment to all other towns on the line of the road, whose need for improv- ed station houses might be equally or more imperative. On the other hand it is alleged that the railroad companies often endeavor to protect themselves from what they call injustice, by threat of retaliatory measures or by actually executing such as in the above case. And that after all, the companies do not pay in the aggregate in the way of direct taxes as much as would be equivalent to the average rate imposed throughout the state on similar corporate property such as banks, gas and manufacturing companies ; rolling stock, in their valuations being classed as real estate, while the funded and floating debt is made to offset and neutralize as in- debebtedness all valuations and assessments against the company for personal property. Duing the year 1869 the aggregate tax paid by .steam railroads on real estate, according to the State engineer, amounted to $1,S6.S,670.52. . If the same propety had paid the average rate of taxation throughout the entire state for that year (2.48 cents on the dollar) the aggregate would have amounted to $6,859,467.75. In New York the real estate of rail- roads as well as the road bed is assessed in the different towns through which the road runs. The Supreme Court of Massachu- setts which has had the question before it in at least three different forms, has uniformly decided that land taken or purchased by rail- road companies for their tracks, not exceeding five rods in width, is taken in the exercise of the right of eminent domain and is there- fore not liable to local taxation. The court held that local taxation of a road bed was illegal bacause the road was a public work, es- " Report of Special Tax Commission 1871, Assembly Documents, 1871, Vol. 3, No. 39. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 127 tablished by public authority, intended for public use and benefit, the use of which is secured to the whole community, and constitutes therefore, like a canal, turnpike or highway, a public easement. After quoting the Massachusetts decision at length, the members of the Commission expressed the opinion that it would be better for New York to adopt the Massachusetts system thus putting the taxation of rail- road companies exclusively under state control. They recommended that the comptroller or some other state offi- cer be authorized to assess the corporate franchise at a valuation equal to the aggregate market value of its capi- tal stock, and funded and floating debt, less the cash on hand. Railroads should be taxed on this value at a fixed rate and should be exempt from all other taxes. The tax could either be paid and used locally, or be paid to the state and used for state purposes. Since franchises, however, were granted in the name of all the people, and since each district through which a railroad runs had special benefits from the railroad in the increase of the value of its local property and of the trade and conven- ience of its citizens, the commission preferred that the tax be used for state purposes. The commission expressed the opinion, also, that one of the avowed objects of those who had framed the tax laws [relating to railroad prop- erty] was to get as much of confusion, inconsistency, and irregularity in the subject matter as the circumstances would render possible. ^^ These recommendations of the special commission met no better fate than did previous recommendations for re- form. Inequalities continued in the assessment not only of railroads but also of telegraph companies, gas com- panies, etc., as well. Telegraph companies were assessed only on their personal property. The largest company in the state had its principal office in the state and was assessed at only $200,000, while another large corporation was assessed at $1000.^® The assessment of the railroad property became increasingly unfair ; in some parts of the state it was assessed higher than other real estate while in " Page 183 of report. "Annual Report of State Assessors, 1874, Senate Documents, 1874, Vol. 2., No. 23. 128 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK other parts it practically escaped taxation. The rolling stock and other personal property was seldom assessed. One reason for this was the difficulty in determining the principal office. Instances arose where the assessors were told in one city that the principal office was in another city while the tax officials there were informed that it was in the first city. The state assessors thought that no such amount of real estate devoted to other uses went untaxed, whether mortgaged or not.''' The press was equally critical, and pointed out, that despite some cases of real injustice to the railroads, the rate of tax paid on the capi- tal invested was very low. The Nezv York Times, for example, held that the state was entitled to exact from railroads and other great corporations some fiscal equiva- lent for the charter privileges given them by the state. The taxes then paid by such corporations, it was pointed out, bore no adequate proportion to the capital invested in the undertakings nor to the large returns secured by the proprietors. This capital, represented by the capital stock, bonds and floating debt, practically escaped taxa- tion, while its enormous earnings contributed nothing to the state. The receipts from the real estate were a baga- telle in comparison with capital or earnings, and yet the real estate as assessed by the district officials was prac- tically the entire basis of taxation. It suggested a tax upon railroads on the basis of stock, bonds, and floating debt, which, it held, might be taken to represent the prop- erty of the railroad. Such a basis of assessment would simplify matters, and eliminate the necessity for trouble- some investigation. Since, however, these three items represent the aggregate of property to be assessed, it would abandon the separate assessment of real estate for state purposes. The road bed, moreover, should not be assessed piecemeal by local authorities since it cannot be properly taxed except as a part of the grand aggre- gate. Neither could land taken for a right of way be treated as ordinary real estate for in reality it was but held in trust for the public, since the right under which " Annual Report of State Assessors, 1877. Senate Documents, 1877, Vol. 2, No. 26. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 129 it was acquired and used was in certain contingencies re- vocable. To treat it as real estate was to assume the com- panies to be absolute owners.^* That such opinions did not weigh heavily with the legislature is shown by the tact that by a statute of 1878 pipe line companies were to be assessed and taxed in the same manner as rail- roads.^" The lack of definiteness in the law continued to cause much litigation. The rule for the proper valuation of rail- load real estate as laid down in Albany and Schenectady Railroad vs Osborn ^^ proved to be unsatisfactory and later court decisions on this point show an important change of opinion. In 1866 the Supreme Court held that the real estate of railroad companies should be assessed at its actual value for the purpose to which it had been adapted and not as mere farming land. In estimating this value the assessors were not bound to consider it merely as land and superstructures, isolated from other parts of the estate which contributed to make up a com- plete and safe railroad system.^* The Court of Appeals, held, in 187 1, that the value of each piece of property was to be estimated in connection with its position, its incidents, and the business and profits to be derived there- from.^^ The first important change in the statuatory system of taxing transportation companies came in 1880. The tax on land and real estate remained as before, but a tax was imposed on gross earnings in lieu of the tax on capital and personal property. This was a state tax, to be paid semi-annnually, of five tenths of one per cent of the gross earnings from business transacted in the state. Compan- " New York Times, Editorial, April S, 1879. An editorial for April 8, 1879 pointed out that in the assessment of capital, the dis- tinction between nominal and actual values must be regarded, at least so far as the stock was concerned. With one or two well- defined legislative rules applicable to the assessment, it suggested there would be no serious difficulty. '• New York Statutes, 1878, Chap. 203. " Above, page 124. " People vs Fredricks, 48 Barbour, 173. ■'Buffalo State Line Railroad vs Assessors, 48, N. Y., 70. 130 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK ies were required to render a sworn report of their gross earnings under a penalty of a ten per cent increase in the tax.^^ In 1 88 1 the tax was specially made a tax upon the corporate franchise or business in the state.^* By a law of 1906 a railroad company whose property was leas- ed to another company must pay a tax of three per cent on all dividends in excess of four per cent.^^ The laws taxing railroads, with some modifications, were applied to other public untility companies. The property of telegraph companies was to be assessed in the districts where located from statements made by the companies.^® The assessment and collection of taxes on this form of property was to be administered in the same way as taxes on other real estate were assessed and collected. In 1896 all companies engaged in furnishing water or gas^' for heating, lighting and power purposes, in addition to the semi-annual five-tenths of one per cent franchise tax upon gross earnings, were required to pay a three per cent tax on dividends declared above four per cent on the actual capital employed. Reports were required showing cap- ital, earnings and dividends. Elevated roads and surface roads not operated by steam were to pay an annual fran- chise tax of one per cent of gross earnings within the state, and three per cent of the dividends declared in ex- cess of four per cent on the capital employed. ^^ "New York Statutes, 1880, Chap. .S42. As stated in the act it applied to every corporation, association or joint stock company, whether domestic or foreign, formed for transportation purposes ; to telegraph, telephone, palace and sleeping car companies. It did pcit. however, applv to street railways. "New York Statutes 1881, Chap. 361. '"New York Stutulcs, 1906, Chap. 477. ""New York Statutes, 1881, Chap. 591. The telegraph companies v:cTe required to furnish an annual report to the state comptroller and to the treasurer of each county where they had property. From the county treasurer the district officials were to get copies of the report from which to make assessments. A law of 1886 (Chap. 6.S9) defined "lines'' as including interest in lands on which poles stand, right to erect poles, and the poles, wires, arras, insulators, etc., used as a part of the line. It further gave the tax collectors the right to sell a part of the line for unpaid taxes and to convey it to the purchaser. " Possibly a comma is omitted after gas. See note on page 135. '" New York Statutes, 1896, Chap. 908. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 131 These statutes, with slight modifications, remain in force and represent the present law for the taxation of public service corporations. All are subject to the annual franchise tax except elevated railways and surface roads not operated by steam, and water, heat, light, and power companies. The exempted railways must pay an annual tax of one per cent of the gross earnings within the state besides a tax of three per cent on dividends in excess of four per cent on the actual amount of capital invested. The water, light, and power companies must pay an an- nual tax of five tenths of one per cent of gross earnings and the three per cent tax on dividends in excess of four per cent on capital invested. In addition to the annual franchise tax all transportation and transmission compan- ies must pay the "additional franchise tax." This amounts to five tenths of one per cent of the gross earnings. All are subject to the organization tax and the stock transfer tax.^® These taxes which are all for state purposes are in lieu of all other taxes for state purposes upon per- sonal property. The companies are, however, assessed and taxed locally — the real estate at situs, and the capital stock at the place of the principal office. Since the state levies a small direct tax, a part of the local tax on cor- porations goes for state purposes. It would seem that only that tax assessed on real estate could be so used. There has been a great deal of litigation since these new taxes have been inaugurated, but this has been due only in small measure to the state taxes. The large ma- jority of cases have arisen from the continued attempt to apply the general property tax to railroad and telegraph companies. In the case of the state tax it has sometimes been necessary for the courts to determinine just what the gross earnings were or what were derived from business "originating and terminating within the state." The Court of Appeals held, for instance, that money received for carrying the mails was not taxable where it was im- " See Chapter II page 31 for a discussion of the Organization Tax, and Chapter III page 52 for the Stock Transfer Tax. In addition to these taxes there is the Special Franchise Tax which is discussed in the next chapter. 132 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK possible to ascertain the proportion of the mail traffic which originated and terminated within the state.^" The questions as to the proper valuation of real estate is responsible for most of the cases relating to local taxa- tion. The courts have alternated between earnings and the cost of reproduction as the proper basis of valuation. Most of the decisions in the 70's and 8o's attributed an miportant place to earnings. The Court of Appeals, for example, in 1871 held that the assessors were justified in taking into consideration the earning power of the road considered as a whole. This was because, it held, "a railroad through the town only, having no connection at either end, would be of no value. The erections and superstructure would destroy its value for farming pur- poses. As a railroad it would have no passengers and no business and would be worthless. The attempt to use it as such would involve debt and embarrassment but no profit. . . Each piece of property is to be estimated in connection with its position, and the business and profit to be derived therefrom. The road in question is part of a whole and is to be valued as such. This is independ- ent of the taxation of the capital. It is the estimate of the value of the real estate for railroad purposes as a mill is to be estimated for its value for milling purposes and not as its value for a church or banking house."^^ In 1882 the Supreme Court held that a railroad should not be valued for taxation as a long narrow strip of land used for farming or for any other purpose except as the bed of a railroad. Nor should the part of a railroad in a particular town be estimated by the cost of any expen- sive rock cut, or quicksand filled, or a terminal located in that town. It should be valued as a part of a whole and the consideration of profits should have a large, if not controlling, influence upon the value.*^ ™ Morgan vs New York Central and Hudson River Railroad, 168 N. Y., 1. " Buffalo and State Line Railroad Company vs Assessors, 48 N. Y., 70. " O. & L. C. Railroad Cotnpany vs Pond, 13 Abbott's New Cases, 1. In the cases of Albany and Greenbush Bridge Company vs. Weaver, (34 Hun, 321 ) and Powers vs Kalbfleish, (25 Appellate Division, 432) practically the same attitude was taken. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 133 In 1897, however, the Court of Appeals held the re- production cost to be the proper basis for valuation. The Delaware, Lackawanna and Western Railroad Company had been assessed on seven and one half miles of road, the cost, rentals, and earnings being taken into considera- tion. This assessment was admitted to be higher than the cost of reproduction. The court pointed out the difficulty of formulating, from the adjudged cases, any general rule applicable in all cases to the valuation of the real estate of a railroad company for the purpose of taxation. The cost of reproduction, said the court, seems to be the just and reasonable rule of valuation, and it could conceive of no reason for assessing the property at a greater sum than this. Whether it was really worth what it would cost to reproduce it would depend upon the earning capacity of the road after it was built. After a road had been valued at what it would cost to procure the land, construct the road bed, put down the ties and rails, and erect the build- ings all new, it was difficult to see any ground for assess- ing it at a larger sum. The value of a railroad for taxa- tion might be much less than the actual cost of produc- ing the property in the condition in which it was found by the assessors, but it could never exceed it. Any method of assessment was erroneous which included the privileg- es and franchises of a company in the valuation of its real estate.^^ In commenting on this decision the New York Public Service Commission for the Second District pointed out that the real ground of the decision was not that the cost of reproduction was necessarily a true basis of value, but the only practical and practicable one. They interpreted the reasoning of the court somewhat as follows : The as- sessors were to assess the real estate and when they be- gan to try to determine how much was earned from in- tangibles and franchises, erroneous decisions would nee- "'Delaware, Lackawanna & Western Railroad Company vs Clapp, 152 N. Y., 39. In 1908 the same court held (O. & W. Railroad Company vs Shaw, 202 N. Y., 556) that reproduction cost was the maximum valuation, for tax purposes, to put upon the part of a continuous railroad situated within a given tax district. If the road were not a paying one the valuation might even be less. 134 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK essarily result. Such determinations were too great for the capacity of the average assessor; that assessors had better be confined to the simple, definite assessment of real estate, easily applied and which would result in practical justice. The court, pointed out the commission, adopted the cost of reproduction with all its known absurdities and inconsistencies. In one town five miles of track may have been constructed with little expense while in an ad- joining one cuts and fills may have been expensive. One portion would be as great value to the operation of the road as another. If there was any theory upon which such discrepant theories could be justified it was cost of reproduction ; yet it was doubtful whether the end was accomplished by that sort of assessment.'"* The decision, however, is more logical than this interpre- tation would indicate. If the property, track, buildings, road bed, etc., were to be assessed piece-meal and disjoint- edly, then the reproduction cost would represent the maximum value any particular portion could have. Very often the value might be less than this. It is only in as- sessing the company as a whole that the earning capacity can be considered since this is an attribute of the whole ])lant and not of any small isolated part. In 1908 the Appellate Division of the Supreme Court prescribed a method for the valuation of the property of a water company. This differs from the methods just de- scribed in that it took earnings as the basis for the as- sessment. It held that where a water company owned tangible property outside the street, and both tangible and intangible property in the street,'^ each of these three classes should be considered as contributing pro rata to the net earnings according to its respective value. Actual value and not cost was the true basis of taxation, hence the value of the intangible property — the mere right to lay water mains — must be determined by treating it as a part of the plant and basing its value upon capitalized net earnings. Intangible property had a value if it was earn- " Report of New York Public ScrA-icc Commission, Second Dis- trict, 1913, Vol. III. p. 306. " By tangible property in the street the court meant the fixtures, etc. while the intangible property was the right to use the street. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 135 ing an income and if, even with good management, there was no adequate return, it had correspondingly little value. The value of the property of a water company for the purpose of taxation, especially the value of its fran- chise and good will, could not be ascertained until the franchise tax,*^ all other taxes and a proper up-keep fund have been deducted from current earnings. The earnings and expenses for one year alone should not be considered, but the average earnings and expenses for a series of years or for such time as is reasonably available. The method prescribed for finding the value of intangible property was as follows : from earnings deduct salaries and other expenses of maintenance, all taxes including approximate amount of the special franchise tax and such earnings as would be proper for all up-keep not ordinarily covered by maintenance account; the balance was to be treated as the actual net earnings. From this six per cent of the value of real estate and other tangible proper- ty was to be deducted as a fair return on investment. The earnings which remained, capialized at six per cent, would represent the fair value of the intangible property.^" Here a definite rule for the valuation of a public utilit}' company for taxation is given with capitalized net earn- ings as the fundamental basis. Yet this rule proved no more satisfactory than former ones and many assessors continued to use their own gtiess work in valuation. The reasoning of the Public Service Commission which we have noted above, and the complexity of the system pro- posed easily explain why it is not generally used. Many assessors do not have the time or inclination to use such schemes as the courts may dictate while many others do not possess the ability to use them even if they had the desire. "This undoubtedly has reference to the special franchise tax which is discussed in the next chapter. Section 186 of the tax law exempts companies formed for supplying water or gas,OJ- for elec- tric or steam heating from the annual franchise tax. A literal in- terpretation of Section 183 of the same law would subject general water companies to the annual franchise tax. Under the list of exemptions it states that companies formed for supplying water or gas for electric or steam heating shall be exempt. "Jamaica Water Supply Company vs Tax Cotnmissioners, 128 Supreme Court, Appellate Division, 13. 136 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK The present system of taxation, though somewhat com- pHcated because of the elaborate classifications of public utilities, did get rid of some of the old difficulties. With the adoption of uniform accounting, corporation reports are becoming more trustworthy and a part of the taxes are easily computed. The gross earnings tax for state purposes has secured a greater equality than when the tax was levied by the local assessors, and is of course a real advance. A large amount of inequality has been found in telegraph valuations since these companies have practical- ly been made their own assessors. The estimated cost of lines as returned by the various companies has shown great disparaities. Although some valuations were ex- tremely low, yet there was no official review and power to question their correctness was nowhere specifically given. But the system has worked smoothly enough so that there have been few complaints from either state officials or the corporations, and consequently the courts have had little to do. This has not been true with assessment and taxation for local purposes. Complaints of inequality continue, and litigation increases. This last is initiated largely by the railroad companies who claim that their property is assessed at much higher figures than is other real prop- erty in the same districts. Many other states are far in advance of New York in seeking to remedy these evils. They have recognized the impossibility of securing equal- ity and justice in the taxation of utility companies through local assessors, and have conferred the power of assessing such companies upon some central board. In New York both state officials and other persons as well as organizations have continued to advocate that such assessment be taken from local officials and given over to a state board. The fourth State Conference on Taxa- tion which met in 1914 at Syracuse adopted the follow- ing resolution : Whereas, The present system of the as- sessment of the real and personal property of railroads and other large corporations by local assessors imposes an unnecessary and difficult task upon such assessors and leads to inequitable results, and. Whereas, This method RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 137 of assessment has been abandoned in many other states, it is Resolved, That the laws should be so changed as to empower the State Board of Tax Commissioners, or ex- perts employed by them, to assess the real property and Cither taxable assets of railroads and of large public ser- vice corporations operating in more than one tax district. To establish a uniform system of taxing public utili- ties which will be just to the corporations and the public, equitable, easily administered and which will leave no loom for evasion is a difificult task. A number of dif- f'.;rent systems have been tried with different bases for the tax but none of them has the unqualified support of every authority on taxation. That the New York system should be recast and improved, however, all agree, and we shall briefly note some possible alternatives or modi- fications.. The systems which have been most discussed are a gross earnings tax, a net earnings tax, and the more conservative method of maintaining some form of the ad valorem system. New York at present, we have seen, uses gross earn- ings as a basis for part of the additional franchise tax. This basis for taxing corporations, and especially public service corporations, is at present widely advocated. Some cf the advantages claimed for the gross earnings tax may be briefly summarized. With gross earnings taken as the basis for taxes we do not find the difficulty of ascertainment as when net income is taken. There has been comparatively little dis- pute as to what constitutes the gross returns of a corpor- ation, but difficulties have been encountered in apportion- ing this to expenses and net returns. ^^ Any system of accounting will give the gross earnings and no question arises as to what items should be allowed. All items of expenses must be taken from the gross receipts, and it is not at all illogical to consider taxes an item of expense just as much as wages, rent, etc. The discretionary pow- ers of officials can easily be dispensed with since there is little chance of manipulating the gross receipts statement "This objection would have little vifeight in the case of New York since practically uniform accounting systems have been prescribed. 138 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK and the tax can be computed by simple mathematical cal- culation. Expenses of assessment and collection would likewise be reduced to a minimum, so the tax would "take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state." It conforms, moreover, more nearly to the American idea of a just base for taxation — property — than does net income. This sort of a property basis does not tax a concern until it has really been es- tablished upon an operating basis. The tax would fluctu- ate with business conditions ; it would increase as business prospered and become a smaller burden in times of de- pression. It is a tax admirably adapted to meet the vary- ing demands of the state since it can be easily modified, and will automatically increase with the prosperity of the state. The assessment upon which the property tax is lev- ied, on the other hand, tends to become stationary. As previously pointed out, this has been particularly true in New York. Some think that the gross earnings tax would work in- justice particularly in the case of railroads. Many, howev- er take the opposite viewwhile a numbr of tax commission reports uphold such a tax. The Ontario commission in 1905, after making an exhausti\e study of railroad taxa- tion, said : The gross earnings tax will cause 110 substantial inequality in the roads operating in Ontario, and as regards equality, there is little to choose between the gross and net basis. The choice would be determined on the ground of facility and certainty in ascertaining what is gross and net revenue. There is little dispute in determ- ining gross revenue, while there is endless dispute in dterm- ining net, especially where it is to the interests of the company to minimize net earnings in order to escape taxation. There is no hesitation in selecting gross revenue as the simplest and most direct, and considering all the roads the most equitable basis of taxation. EarninRs as a basis is fair because taxes vary with the capacity of a company to pay them whereas taxes on general property results in all manner of inequality. The amount of tangible property of various corporations has no necessary relation to their relative earning power and bears no accurate relation to the earning power of the same company at different periods. Only the tax on earn- ings follows automatically the capacity of the corporation to pay, and while it has its enequalities, it is much more equitable than any other practical system. The tax has the further advantage that all the processes connected with its operation are matters of public record. Thus the railroad on the one hand and the government RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 139 and public on the other may know exactly the basis of valuation, the rate of tax and the relative contributions of the tax payers in proportion to their business. Where the valuation depends more or less absolutely upon the opinion of one or two assessors who can not be quite sure of their own estimate either individually or col- lectively, it is obvious that the most unusual power without any adequate check is placed in the hands of one or two men. Where he has small properties to estimate and where each man's property was known to his neighbor this system had few difficult evils. But where railroads and other corporations the value of whose prop- erty is hardly known to themselves, are required to pay millions of dollars in taxes without any knowledge as to how their own or their rivals' assessments are made up, and where the public is nec- essarily in even more complete ignorance the opportunity and temp- tation is very great to bring influences to bear upon the government for the appointment of favorable assessors or upon the assessors themselves, for a favorable valuation. It is not in the interest of pure politics or sound finance, and it is certainly not fair either to the assessment boards or general public for a system of taxation to place such enormous interests as the value of many millions of corporate property in the hands of two men. One of the most important advantages is that it does away with the difficulty of the taxing of franchises. Probably no aspect of modern economic wealth has given rise to such elaborate and confus- ed discussion and even outlandish theorizing as the so-called "fran- chise" values. It is a confusion of the two economic phases in which "franchise" is used to indicate property value with the oc- cassional intoduction of legal aspects which has contributed so much to the darkening of counsel on the subject. Mr. Thomas F. Woodlock of Wall Street Journal reported to the commission that he favored a gross earnings tax. Then you cannot charge expenses for wholesale betterments, etc. It may happen that one road is compelled to operate at seventy five per cent of expenses and anoth- er at fifty, but the gross earnings are most suitable because easily ascertained. Mr. Hugh L. Bond, second vice-president of the Bal- timore and Ohio Railroad, stated to the commission that he thought on the whole the most equitable basis fo rthe taxation of railroads is the gross receipts.™ This quotation, of course, applies in particular to a Canadian country but conditions there are not dissimilar to those found in New York. But we do not have to go to Canada to find the gross earnings system advocated and tried. The reports of the tax commissioners of both California and Minnesota heartily indorse it. The Cali- fornia commission in 1906 said that it would result in a closer approximation to justice than any other system which the state might select. The burden would vary with the fund out of which the taxes were to be paid. ™ Report of Ontario Commission on Railroad Taxational 1905. Printed in State and Local Taxation, 1911. 140 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK Practical considerations naturally outweighed theoretical ones and the advantages of this tax were largely practi- cal.*" The Minnesota commission in 1910 pointed out that the greatest advantage of such a tax was the elimination of the necessity for valuing the complicated and peculiar properties of the corporation. Such valuations had been inaccurate and but crude guess work. To even approxi- mate a fair value of such property required in each case the knowledge and skill of experts. A tax on gross earn- ings, moreover, not only rendered taxation a mere mat- ter of mathematical computation, but gave to the system a desirable certainty and reliability. The method was the best yet suggested and the practical experience of a few years would fix a fair rate.*^ In 191 1 the Connecticut legislature appointed a com- mittee to prepare a report on corporate taxation. This report was made in 191 3 and, after a thorough examina- tion of the other tax systems, recommended the adoption of the gross earnings tax. On pages 6 and 7 we find : The tax on gross earnings avoids all the difficulties inherent in the tax on net earnings. No corporation can do business without having accounts which will at least show the amount of its gross earnings. Gross earnings are a definite fact, ascertained by a glance at the accounts, and incapable of argument or difference of opinion. The tax on gross earnings can be evaded only by perjury of the most obvious sort and capable of easy detection. The gross earnings tax, therefore, has the greatest advantage of simplicity, certainty, and ease of administration. This is an advantage both to the cor- poration and to the state. The amount of the tax on gross earn- ings fluctuates with the posperity or adversity of the business and is therefore, just to all parties concerned. Moreover, it enters each year into the accounts in a definite ratio, and can thus be count- ed on in advance. A serious question remains to be answered. Will not the tax on gross earnings be distinctly unfair on account of the great di- versity between different corporations in their ratios of expense to earnings? The answer is that such injustices is to be avoided by classifying corporations according to the prevailing ratio of net earnings to gross, and imposing different rates upon the gross earn- ings of the different classes of corporations. Investigation shows, for instance, that the ratio of net earnings to gross is fairly uniform for the railroads of the country. In the " Report of California Tax Commission, 1920. Printed in State and Local Taxation, 1911. "Report of Minnesota Tax Commission, 1910. Printed in State and Local Taxation, 1911. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 141 same way there is a general prevailing ratio of net earnings to gross fo rtelephone companies, fo express companies ,etc. Having de- termined what this- prevailing ratio is for each class of corporations we are enabled to fix ratios fo reach class which will make the tax on goss earnings just to all. It is true, of course, that absolute justice as between individual corporations of the same class is not obtained. The resulting injustice is, however, not great. Some inequality is unavoidable but the inequality thus esulting is distinctly less than can be easily shown to result from any of the other schemes of taxation which are before us. No tax system can be absolutely perfect, and it is not a valid objection against a proposed scheme to point out a defect which is present in even greater degree in each of the other possible alternative measures. We conclude, therefore, that the tax on gross earnings presents distinctively the most advantageous method for the taxation of pub- lic service corporations." The commissioners continue, in this report, to show how the classification shall be made, how the ratio be- tween gross and net earnings shall be determined, and give formulae for finding the proper rate to be imposed on the gross earnings. They hold that the rates should tax the different classes of corporations fairly as compar- ed with the taxation borne by other forms of wealth. Other reports have been favorable to the gross earn- ings tax and a number of states use it as supplementing other taxes. Different schemes, as suggested by the quo- tation we have just given, may be used to secure justice. If a f^at rate on gross earnings be considered unjust, the remedy lies in classification of the corporations. No ob- jection could be made to classification in New York since it is used in the present tax system. Classification may be on the basis of the enterprise, the relation of gross to net revenue, or both. In any departure from the flat rate great care should be taken that greater inequalities are not introduced than if a flat rate were maintained.*^ *' Report of the Special Commission on Taxation of Corporations, State of Connecticut, 1913. *' An interesting scheme for assessing the gross earnings tax has been proposed by Mr. Allen Ripley Foote, ex-president of the Nat- ional Tax Association, He proposes a flat rate on gross operat- ing revenue, plus a differential on the margin of difference between operating revenue and operating expenses. He would make this a substitute for all other kinds of taxes. Such a scheme, he thinks, combines both the principles of the property and income tax which would satisfy the advocates of each of these systems while justice would be given to the corporations. He proposes that a flat rate 142 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK In spite of this wide advocacy and apparent success of the gross earnings tax, we must admit that it has serious difficulties. Gross receipts do not represent earning ca- pacity, and it is earning capacity that makes a concern valuable and able to pay taxes. It is what a concern has left after expenses are paid that spells success or failure. The gross returns of two street railway concerns for ex- ample, might be the same, while the net returns might be such as to make one a success and the other a failure. The one might be working under auspicious circumstanc- es — short lines, heavy traffic, level streets, etc. — while the other would have the opposite conditions. Similar conditions are found in varying degree in all classes of public utility corporations and it is too much to suppose that any system of classfication can properly take them into account. The tax, then, will to a greater or less de- gree be ununiform as between corporations, to say noth- ing of its relation to other taxes. The experience of Michigan and Wisconsin, moreover, would tend to weaken our faith in the adequacy of the gross earnings tax. Both states have given it a thorough trial and have thrown it o^'er-board. Wisconsin had the system for nearly fifty years, but gave it up in 1902. The reasons assigned by the officials of both states for this failure to give satisfaction were practically the same. Uniformity could not be secured between the corporations and there was no relation between the tax paid on cor- porate property and on odier property. The governors under whose administration the gross earnings tax was e^iven up, had pledged themselves to equality in taxation. It is contended by some, however, that a tax based up- of two per cent be assessed on the gross operating revenue of all corporations regardless of the margin of difference between their total revenue and total operating expenses. This is to be paid by all corporations whose operating expenses are ninety per cent or more of operating revenue. To this is to be added a differential of one-sixthtecnth of one per cent computed on each one per cent in- crease in the margin of difference between total revenue and total operating expenses in excess of ten per cent. Theoretically such a method would obtain a reasonable amount of justice, but the prac- tical difficulties in determining the differential would no doubt de- feat the end intended. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 143 on net earnings will do more towards obtaining justice and equality than can a gross earnings tax. Net earn- ings can be used, either as the direct basis for the tax or as the basis for finding the value of the company. If the capitalized net earnings be taken as the proper valuation of a concern then no account need be taken of capital that may have been issued and squandered, the different forms of stock exchange manulipulation or the watered stock a company may have. The factor under consideration is what the enterprise is worth as a productive agent or as a going concern. The original cost and cost of reproduc- tion are not the controlling items which determine value ; that is determined by the one characteristic — power to bring in a money return over and above expenses. The captalized net income would most nearly correspond to what a purchaser would be willing to pay at a natural sale — and this the courts have held to be the value of property. Mr. W. S. Stevens, a member of the New York Public Service Commission, expressed the opinion that the net earthings tax was the one tax that would have the support of basic principle. To quote : An inquiry into the value of railroad propertj' as a \vhole is an investigation of the question how much will any person or collec- tion of persons desire to possess the property, and how much money or other things will they be willing to part with for the sake of such possessions. The difficulty attending the investigation is : 1. The property has never been bought or sold so there is no direct test or evidence of its ratio of exchange for money or other things ; 2. It is not one of a class of things which is bought or sold with such frequency or under such circumstances as to afford a fair test of what it would be likely to bring upon exchange or sale. . . The only course open to the investor is to select those attributes which in his judgment would create a desire for the propety, and then estimate how much that desire would induce a prospective pur- chaser to surrender for its satisfaction Its one charac- teristic which gives it value is its supposed power to yield, directly or indirectly, a moneyed return equal to the investment with a profit thereon. Its value lies not in what it is but in what it will produce or what it is believed it will poduce in money. This is the essential proposition upon which all depends. Generally speak- ing, what it will produce in money will depend upon its earning power, directly or indirectly. To the ordinary investor it is its direct earning power as shown by the excess of revenues over expenses. This fundamental consideration indicates that the net earnings rule, when properly and care- 144 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK fully applied with due regard to all the features of the individual case is probably the one having the surest support of basic principle. It is also the one which accords with the practice of shrewd, broad- minded and successful men of business." In spite of the apparent logical and theoretical sound- ness of net earnings as a tax basis, many practical diffi- culties are met in its administration. One, which has proved most troublesome, is in determining the true net earnings. Accounting systems have been anything but uniform, and no comparison could Ije had between net earnings of different enterprises. This applies, however, with little force to New York since in recent years practic- ally uniform accounting systems have been arranged for public utility corporations. Even with uniform account- ing the difiiculty might still remain of separating the earnings of the utility company from those of its invest- ments or subsidiary undertakings. Neither would the system secure equality in assessment between public util- ity companies and other forms of taxable property. The difficulties which Wisconsin and Michigan found with the gross earnings tax would be magnified here. A man's farm and buildings are taxed even though they are pro- ducing no more than expenses. Yet a railroad with an investment of several million dollars would not be taxed until it became operative to the extent of having a sur- plus above expenses. Because of the fluctuation of earn- ings, the amount of the tax could not be counted upon as being in any degree stable. The special commission which reported to the Connec- ticut legislature in 1913 in favor of the gross earnings tax characterized the net earnings tax as follows : To avoid serious inequality and evasion the tax on net earnings would require for administration a thorough examination into the accounts of every corporation taxed, together with strict rules as to how these accounts should be kept. ... It would be a con- tinual source of irritation between the corporation and the taxing officials. It would involve the most disagreeable inquisition into the accounts and business of the corporations, and in the end there would still remain room for personal judgment, thus leaving open the door to political intrigue and corrupt influence. . . The practical difficulities in the way of imposing a tax upon net earn- ings seem overwhelming. A further objection arises from the fact "Quoted in State and Local Taxation, 1912, p. 194. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 145 that d corporation might have no net earnings whatever in a given year, and therefore escape taxation entirely. While it is true that this might be perfectly just under a tax system based fundamentally upon income, we should bear in mind that the American tax sys- tem is today based upon property. The individual whose property has yielded him no income in a given year cannot offer that as a rea- son why he should not pay taxes upon his property. While the import- ance of treating corporations and individuals upon the same foot- ing must not be stretched, there can be little doubt that a tax sys- tem which would allow corporations having no net earnings to es- cape taxation entirely would be out of harmony with the general tax system prevailing in America." The objections to the ad valorem basis for taxing pubHc utiHties are due largely to misunderstanding of the term, and to the discrepancies which have arisen in attempting to apply different methods of valuation. As now used, an ad valorem tax means a tax based upon the value of a public utility as a piece of property rather than as divid- ed up into different elements. The system further im- plies a more or less expert valuation of the corporation property by some centralized state board. The discrepancies have arisen because of the limited powers of the assessors, or because too few factors have been taken into account in arriving at the valuation. One particularly troublesome feature has been to secure the value of the so-called franchise. The excess value of the stocks and bonds over the value of the real estate has been suggested as the value of the franchise. The average selhng price of securities for a period of years is taken as the value. This is done in order to take account of any fluctuations due to seasonal disturbances or stock ex- change manipulations. The greatest difficulty is perhaps in application. Thus the Michigan Tax Commissioners point out the difficulties which they encountered : But as far as applying this theory to all the railroads in Michigan was concerned, it was found to be impracticable from the fact that the stocks and bonds of but comparatively few of the railroads were quoted in the market, that the stocks and bonds of many of the railroads were unknown to the open market, and the method could be applied only to the few railroads. Then, too the computation of the bond value is rendered intricate and uncertain by reason of the fact that there may be several different issues of bonds issued by a company upon different portions of its line or upon the same por- " Report of Special Commission on Taxation of Corporations, Connecticut, 1913. Page 35. 146 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK tion of its line; or the issue may have been made at a certain time covering the whole line, since which time the line may have been extended without it appearing how the issue is affected, or in what manner. Another difficulty encountered in attempting to apply the stock and bond method in determining the value of railroads lies in the separation of railroad property devoted to operation from the prop- erty owned by the railroad but not used in its operation. The stocks and bonds of a railroad company represent the value of all the prop- erty of that company whether devoted to operation or not ; manufac- turing plants, mines, elevators, etc And when we con- sider, in addition to the intricacy and uncertainty of the computa- tion of stock and bond values, the manipulation by stock brokers, regardless of the many conditions that affect the price or value of the stocks and bonds regardless of the real value of the property itself, we cannot but appreciate the incompetency and unreliability of the system.*' This criticism is made to the application of the stock and bond method for valuing railroads but it is applicable in varying degree to public utilities. Administrative diiifi- culties have likewise arisen in the attempt to find the value from earnings, initial cost, or reproduction cost. The item that is a determining factor with one concern may be unimportant for another. The report of the Con- necticut Special Tax Commission which advocated the adoption of the gross earnings tax, characterized the ad valorem basis as follows : To be properly performed it requires the work of a large force of experts familiar with the technical details of the business of the corporations concerned. At best the element of personal judgment is sure to enter. Besides practical difficulties, important theoretical questions arise. In the majority of cases there is and can be, no such thing as an actual sale of the property of a public service corporation. The selling price is, therefore, unavailable as a basis of valuation. Shall the appraisal, then, seek to determine the original cost of the property or the cost of replacement, and if the latter, shall allowance be made for the present condition due to depreciation ? . . . . Another difficulty with this method is its rigidity. Valuations when once made are very likely to remain for a considerable number of years without serious revision. This is caused partly by the very fact of the difficulty and expense in- volved in a thorough-going valuation. As a result, such valuations, no matter how successfully made at the start, very soon come to the unreliable."' We note, however, the attitude of Wisconsin, Mich- ■" Report of Board of State Tax Commissioners, Michigan, 1909- 1910. P. 55. " Report of Special Commission on Taxation and Corporations, Connecticut, 1913, page 2. RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 147 igan, and Virginia to tiie ad valorem basis, we must ques- tion that it is wholly bad. Wisconsin, as we have seen, gave up the gross earnings tax in its favor and that, too. after the courts had stretched the constitution to declare the legality of the former. The attitude can be seen from the following extract from the report of the Wisconsin Tax Commission for 1910: By substantially uniform ad alorem methods a nearer approach can be made to equality in tax burdens as between the different classes of public utilities, and as between them and general property, than seems practicable by resort to earnings as the basis of taxa- tion. A tax based upon earnings at fixed rates involves the problem of ascertaining rates which are just and which will accomplish sub- stantial equality of burden with property taxed by other methods. . In respect to most of the property employed in the various public service enterprises now under consideration such method seems fairly well adapted if the work of assessment is committed to officers having facilities for obtaining the necessary data and who are fairly qualified to make intelligent and impartial valua- tions.*' The attitvide of the Michigan Tax Commissioners is very similar to that taken in Wisconsin. In a report to the Governor in 1914, moreover, the Virginia Joint Committee on Tax Revision, after a careful analysis of different tax bases, says: "We believe that under an ad valorem system administered by a competent board un- trammeled by any single prescribed standard or rule, it is easier to establish justice in taxation than under any other method.*^ It would seem, then, that the success or failure of the ad valorem tax to secure justice depends upon the com- petency of the assessing board, and the extent of power conferred upon it. We would consider it absurd to send a man or group of men to value a carriage who had spent their life as sailors. And we would consider it just as absurd to instruct men who were competent to determine the value of a carriage, to arrive at such value by taking into consideration only the wheels, or bed, or pole, or top. A particular carriage might have no top, or shafts instead of pole, or the wheels might be newly painted, so that no "Report of Wisconsin Tax Commission, 1910, page 52. " Report of the Joint Committee on Tax Revision, Virginia, 1914, page 138. 148 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK one of these could be taken as the determining factor in its value. Likewise they should be allowed to ex- amine the spindles and tires to see how much they were worn — in short take all parts into consideration to de- termine its value. So, in finding the value of a public utility, not only must we have a competent board, but it must have broad powers. It must be allowed to consider all the factors which may contribute to its value — fran- chise, reproduction cost, earnings, etc. Not only must it be given power to consider all these items, but it must be given access to them. In order to efficiently carry on its work, the books, accounts, and records of the compan- ies must be placed at its disposal. It should be empow- ered to examine witness and require reports — in short given every possible privilege which will enable it to make a proper valuation. Where we have this combination — a competent board with extensive powers — the prevalent objections to the ad valorem basis for taxation are great- ly minimized. A tax on earnings, moreover, is not such an out and out departure from a tax on value as it at first would seem. When we do not regulate the charges for services there may be no definite relation between the property in use by plant and its earnings ; but we have adopted the policy of so regulating the charges made by public utilities that the net earnings shall represent but a fair return on the value of the enterprise. Of course there is no absolute rule for determining the value upon which earnings shall be allowed, and it is impossible to determine value so ex- actly or to fix rates so accurately in each particular case that a fair return will just be realized. But the more nearly this is approximated the more nearly will a tax on earnings correspond to one on value. It could make little difiference in a case of perfect valuation and regula- tion of charges, where ten per cent were allowed as a fair return, whether ten percent of the net earnings were taken or one per cent, of the valuation. Because of the indefinite relation between net and gross returns, however, there could not be this close approximation between a gross earnings tax and a tax on value even if regulation RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 149 could be such as to allow just a fair return. Yet they more nearly correspond than under a system of no regula- tion. Justice in tax reform is a relative rather than absolute expression. We cannot hope for absolute justice between corporations or between corporate property and other property. But there is no reason why it should not be more nearly approximated in New York than at present. The substitution of either an earnings tax or a tax on value, notwithstanding the difficulties connected with each, would prove more satisfactory than the present combination of franchise, earnings, and dividend taxes. Such action would mean a change from the present com- plexity to comparative simplicity. Corporations would at least know upon what they were being taxed, and could more nearly anticipate their tax burdens. Simplicity would bring intelligent publicity, with greater ease in ob- taining justice among the public utility enterprises them- selves, and between the taxes assessed to such companies and those laid upon other taxable property. Centraliza- tion of the assessing authority would facilitate checking up any discrepancies that might exist. In short, it would make for uniformity and fairness, and where this has been accomplished it has been found that corporation officials were willing to cooperate with taxing officials to secure efficient enforcement of the law. If the system of taxing public service corporations for state purposes needs reform, the system for taxing them locally needs it doubly. The incongruities depicted by the Special Tax Commission in 1871*" still remain. Re- form might be secured by the entire abolition of local as- sessment of public utility property^" if the localities could be made to see that, by so doing, they would not be the losers, and the legislators could be made to see that great- er equalitv would be secured thereby. It would seem ad- visable that some centralized authority should have in charge, at least, the assessment of those companies whose plants extend into several districts. "See above p. 126. ,. , u "This is of course on the assumption that the courts would uphold the constitutionality of such a change. ISO DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK If some form of unit assessment, however, be adopt- ed for determining the state taxes, reform in securing local revenue from these same enterprises could be accom- plished with litttle added burden or expense. The amount intended for local purposes could be added to the state assessment and then distributed to the districts. The difficulty arises, of course, in choosing a basis for distri- bution. This could be made in proportion to the amount of trackage in the dstrict, the amount of property located there, or the amount of business arising within its bord- ers. From many standpoints the first of these has advan- tages. Where the business is greatest, the main lines are not only duplicated, but are supplemented by side tracks and switches. If it were considered that justice so de- manded, the main lines and side tracks could be counted as having different importance. Such allocation would rarely be needed except in the case of transportation and transmission companies. If a property basis were taken it would introduce the necessity for local valuations and the possibility for inequality. The tendency, no doubt, would be towards high valua- tion since the higher the value of the property in the dis- trict, the more tax it would receive. Because, then, of the complexities of the present sys- tem of taxing public utility corporations, because of the discrepancies and inequalities which exist, not only be- tween the different corporations but between the assess- ment of the corporate property and other property, we conclude that reform is needed. In the light of exper- ience from other states we believe a unit method of as- sessment by central authority, either upon earnings or value, would be a marked advance over the present sys- tem. Finally, the system would more nearly approximate justice if the local revenue from public utilities were ap- portioned by central authorities to districts, perhaps on the basis of total trackasre found therein. CHAPTER VIII THE SPECIAI, TAXATION OF PUBUC SERVICE CORPORATIONS There is probably no part of the New York system of taxation which has been more widely discussed than the so-called "Ford Special Franchise Tax." Although Senator John Ford was sponsor for the statute, the person primarily responsible for its enactment was Theodore Roosevelt, then Governor of the State. In his first mess- age to the legislature Governor Roosevelt condemned the existing system in general terms. ^ In his special message of March 27, 1899,^ he went further, committing himself to a reform of corporate taxation : It is true that a corporation which derives its powers from the state should pay to the state a just percentage of its earnings as a return for the privileges it enjoys. This should be especially true for the franchise bestowed upon gas companies, street railways and the like. The question of municipal ownership of these franchises cannot be raised with propriety until the governments of all munic- alities show greater wisdom than has been recently shown in New York City. . . I need not point out that in foreign communities a very large percentage of the taxes comes from corporations which use the public domain for pipes, tracks and the like. Whether these franchises should be taxed as realty; or whether it would be wiser to provide that, after the gross earnings equal, say ten per cent of the actual original cost, then five per cent of all earnings over and above this shall be paid into the city treasury; or whether some yet different plan should be tried can only be settled after a careful examination of the whole subject. One thing is certain, that the franchise should in some form yield a moneyed return to the gov- ernment. ^ Governor Roosevelt's Message, Jan. 4, 1899. With regard to taxation he said in part : "At present our system of taxation is in utter confusion, full of injustice and queer anomolies We should discourage the building up of non-taxable interests yet we should discourage driving property out of the state by unwise taxa- tion or levying a tax which is in effect largely a tax upon honesty. I most earnestly commend the whole matter to your special atten- tion." ° Governor Roosevelt's Special Message, House Journal, 1899, Vol. 2, p. 186. 151 152 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK Governor Roosevelt, in this message, suggested that there be some general scheme of taxation applying to all public service companies. He asked for a joint committee of the senate and assembly to in\estigate the subject in full and report to the next legislature. He asked for a legislative commission because, he said, it had been the almost universal experience that however excellent the re- ports made by special non-legislative tax commissions, the legislatures paid little or no heed to them. Shortly after this message was made public, Senator Ford introduced his bill for taxing franchises. The bill passed the Senate by the vote of 33 to ii. Strenuous opposition, however, developed in the Assembly, and Governor Roose\elt found it necessary to exert pressure to secure the passage of the bill. When it seemed on the verge of defeat he sent the following special message : It appearing to my satisfaction that the pubHc interests demands it, therefore in accordance with the provision of section 15, article 3 of the constitution and by virtue of the authority thereby con- ferred upon me, I do hereby certify to the necessity of the imme- diate passage of Senate Bill 1102 entitled, An Act to amend the tax law relating to the taxation of public franchises as real property.* This message was not read in the assembly. As soon as the go\'ernor discovered this he sent another special message : I learn that the emergency message which I sent last evening to the assembly on behalf of the franchise tax has not been read. I therefore send hereby another message upon the subject. I need not press upon the assembly the need of passing this bill at once. It has been parsed by an overwhelming vote in the senate. A large majority of the nssembly have signed a petition asking that it be put through. It c>;t;ibli'.hes the principle that hereafter corpora- tions holding franchises from the public shall pay their just share of the public burden. It is too late to try to amend or perfect the bill, even should such amendment or improvement be deemed de- sirable. It is one of the most important measures (I am tempted to say the most important measure) that has been before the legis- lature this venr. I cannot too strongh- urge its immediate pass- age." There could be no uncertainty as to the meaning of this message. On the last day of the session the bill was ' Roosevelt's Message, April 21 , 1899, Public Papers of Governor l^.osevelt, 1899, p. 88. 'Governor Roosevelt's Message to the Assembly, April 28, 1899, PuMic Papers of Governor Roosevelt, 1899, p. 89. SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 1 53 passed and then came before the Governor for his sig- nature. Vigorous opposition developed and glaring de- fects were pointed out. The most weighty objections were, first, that local assessors could not approximate equality in assessing franchise and, second, that the addi- tion of this tax to the special taxes already imposed by some municipalities on franchise would constitute heavy double taxation. Governor Roosevelt refused to veto the bill, thus allowing the matter to wait over until the next session of the legislature. Instead he called a special session to secure satisfactory amendments. When the legislature convened the Governor sent it a lengthy message dealing with the matter. He reiterated much that he had said before, and again emphasized the importance of franchise taxation. He did not intend, he said, to oppress people who had put their money into the use of the city's or the state's real estate which made the franchise valuable. If it were worth little, it should be taxed little ; if of great value it should be heavily taxed. He was convinced that the opposition to the bill before him, was directed not so much against its particular fea- tures as against the general principle of taxing franchises. Because of the determination of the interests affected to defeat franchise taxation, he deemed it necessary to se- cure statuatory recognition of this principle at that session of the legislature. For this reason he justified his special message to which its passage was due. The bill as it stood represented a long stride in the right direction, and the ground thus gained must be held. In the essential feature — taxing franchises as realty — the measure was right. In two important particulars, however, he asked for amendment. One was to entrust the work of assess- ment to the State Board of Tax Commissioners ; the other was to allow deductions for any franchise taxes paid a corporation to a municipality or other local unit. A few companies, he pointed out, already paid in this way as much as five per cent on gross earnings.® That the legislature would adopt the proposed amend- ' Governor Roosevelt's Message, May 22, 1899. Public Papers of Governor Roosevelt, 1899, p. 102. 1 54 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK merits was not a foregone conclusion. Some members of the legislature, including the author of the bill himself, objected to the amendments while others resented the use of executive pressure. Senator R. H. Mitchell probably expressed the attitude of a member when he said ; "The governor is up against it. He issues an ultimatum to the legislature defining just what sort of a bill he will accept. I believe that a majority of the members of the legislature will go to Albany determined not to do what he demands just to show him that they, and not he, constitute the law- making power."' But the real question before the legislature was not merely whether the law would be improved by the pro- posed amendments. The governor had made it plain that unless the amended bill were in his hands before May 27, he would sign the act as it was before him. The amendments undoubtedly bettered the measure and and to adopt them seemed the preferable alternative. This the legislature did May 26, 1899. That the Governor took upon himself the credit for the measure is plain from his utterance subsequent to its passage.^ The provisions of law" are substantially as follows. Under the term land or real estate are included the value of all franchises, rights or permissions to construct, main- tain or operate in, under, above or through the streets highways or public places. Such franchises are, for the purposes of taxation, to be known as special franchises, and are further defined so as to include the value of tangi- ble property situated in such places and used in connection with a special franchise. The Board of Tax Commissioners are annually to de- termine the valuation of each special franchise. They ' Nrzv York Times, May 6, 1899. 'In a speech at the Johnstown Fair he said: " the men in the legislature from whom I obtained the most aid in pushing through the franchise tax act It required boldness of ac- tion to get it through the legislature, but it could not be passed in any other way. The qualities of courage, of boldness and of com- mon sense have got to be shown in passing any real legislative measure which has to meet a powerful opposition." — New York Trihmic, September 7, 1899. "New York Statutes, 1899, Chap. 712. SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS ISS must file with the clerk of the assessment district a writ- ten statement of this valuation, not less than ten nor more than thirty days before an annual assessment is to be made.'" Every company subject to such taxation must, within thirty days after each franchise is acquired, make a written report, under oath, to the state board. In the report is to be a description of the franchise, any obliga- tion upon it and any other information the board may re- quire. '^ The board meets at specified times to hear and determine complaints, with the provision, however, that such determinations may be reviewed through the courts. This law, then provides for a tax in addition to any pre- viously existing tax, to be assessed upon the right to use a public thoroughfare and upon the fixtures found there- in. Such property is considered real estate, is to be as- sessed by the State Board of Tax Commissioners, whose determinations are subject to court review. The law has been amended at minor points but its significant features remain unchanged. This special franchise tax has been much discussed. The press was at first generally favorable to franchise taxation but was inclined to find fault with the Governor's methods of procedure, and there was not a little satirical comment on the predicament in which he found himself when he had forced the passage of a bill which he would not sign. Public sentiment was against the special ses- sion ; it was thought that the Governor might better have vetoed the bill, and permitted the matter to wait over till the next regular session of the legislature. The special session was deemed a measure of political expediency, — to save the Governor from the humiliation of having to veto his own bill. But in its final form the act was given at the time the almost unanimous approval of the press of "The taxing officer of the district must furnish any information required by the State Board for the purpose of determining the value of the franchise. A copy of the valuation is to be delivered by the clerk to the assessors within five days after he receives it and they are to enter it upon the assessment roll. " A penalty of one hundred dollars is imposed for failure to make any required report and in addition ten dollars per day for each day the failure continues. 1 56 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK the state and even of the country.'^ Tammany Hall sent to the Governor a memorial favoring the bill.^^ One important feature of the law is its definition of special franchises as "real estate". This provision was made necessary because of the working of the general tax law under which corporations were assessed locally. In the assessments of personalty debts were allowed to be deducted or "sworn off." Such could not be done, how- ever, with the assessment of real estate. Under this law corporations had to a great extent escaped taxation upon iheir capital since the part covered by bonds was an in- debtedness and could properly be deducted. Where the bonds equaled or exceeded the capital only the real estate was left to be taxed. Had the special franchise, then, been designated as personalty, the purpose of the law would have been defeated to a great extent by the deduct- ion of bonded indebtedness from the assessment. Sena- tor Ford emphasized the importance of this feature : "The main virtue of the bill is that it proposes to tax these properties as real estate instead of as personalty — that means that whatever tax the assessors levy must be paid. It cannot be 'sworn off' nor can indebtedness be offset against it. In other words the possessor of the "The Nezi' York Times may be cited as an exception. From the beginning it criticised the principle of franchise taxation. The Commercial and Financial Chronicle took the same attitude as the Times. To quote from the Chronicle (Public Opinion. Vol. 26: 648) "The diflficuity, it seems to us, lies deeper than any general question of how the law may be applied. The theory on which the entire measure is constructed is erroneous. A corporation fran- chise is not real estate and the briefest possible discussion of the bill has shown into what embarrassment and confusion the tax ad- ministration will be thrown by insisting upon such classification. The case simply amounts to this — that provisions framed for one purpose, and peculiarly adapted to that purpose, are suddenly and without substantial change, applied to something of a wholly differ- ent nature." "New York Times, May 12, 1899. In the memorial it was main- tained that the bill was intended to remove inequality. It would reach the corporations who had special privileges taken by right of eminent domain. These privileges were to be the subject of taxation and such a law would mark a great advance in the New York system of taxation. The privileges should be taxed, it argued, since they are the most valuable part of the corporation property. Without them the rest of the property would be junk. SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 157 public franchise is placed in the same position, as far as the tax laws are concerned, as the owner of a house and lot, which property is taxed regardless of whether it is producing revenue or not and without regard to the mort- gage that may be upon it, even though that mortgage covers eighty per cent of the total value of the proper- ty."" The assessment and valuation of the special franchise has proved particularly difficult. The law as first passed by the legislature had left the assessment to local asses- sors, but in its final form this was given over to the State Board of Tax Commissioners. Senator Ford opposed the centralization of assessment, holding that, under a rule which he suggested, local assessors would have no diffi- culty in arriving at special franchise valuation. ^^ The law prescribed no particular method of assessment, such matters being left to the discretion of the tax commission. Before beginning its work the commission asked the Attorney General for an opinion as to the method of pro- cedure. This was given by Mr. J. Newton Fiero, counsel designated for the purpose, September 28, 1899. The purpose of the act, he thought, was to subject cer- tain classes of franchises, and those only, to assessment ; it did not give the right to assess a corporation for the privilege of exercising its right to exist as such, or for its good-will, or on the choice or conduct of its business. He reviewed the New York court decisions relating to the valuation of corporate property and franchises as well as the systems of valuation used by other states. Some of these, he pointed out, would be in harmony with New York decisions. He concluded that the practical and practicable method of arriving at the entire value of assets with a view to assessing the special franchise necessitated a considera- tion of the cost of the real estate, and of the earning ca- pacity of the property as a whole. As elements going to ^"■New York Times, April 30, 1899. "The rule suggested by Senator Ford was practically the stock and bond method of valuation. The difference between the value of the stock and bonds, and the reproduction cost of tangible^ as- sets would represent the value of the public and special franchises. 158 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK make up such values by showing earning capacity, the value of the capital stock, surplus, and bonded indebted- ness must also be considered. In addition all circumstan- ces which tend to enhance or depreciate the value of cor- porate property had to be taken into account. A consid- eration of such factors, modified in each case to suit the circumstances, would give the value of the entire corpo- rate property. When this value is determined, however, the problem is by no means solved. The only assessment to be made was of the "special franchise" together with the "value of the tangible property" used in direct connection with it. Obviously deductions from the entire corporate value were necessary. Indebtedness could not be allowed to lessen the assessment since the special franchises were classed as real estate, from which deductions of indebted- ness were not permitted. Real estate, however, which was not included in the statuatory definition could not be assessed as a part of the special franchise, and its value must be deducted from the entire value of the corpora- tion's property and franchises. The value of the tangi- ble and personal property, likewise, it was necessary to deduct. Besides these items the general franchise to be a corporation had a distinct value, as well as the choice, conduct, and good will of the business which values could not be included in the special franchise. In short, all the property which did not come within the definition of a special franchise must be deducted from the total valu- ation. From these considerations he concluded that "the value of a 'special franchise,' therefore, is arrived at by ascer- taining the value of the entire corporate property, taking into consideration all the elements which go to make up such value, and deducting therefrom the value of the per- sonal property of the corporation, of so much of the real estate as is not connected with the special franchise, and of the franchises not affected by this amendment, in fine, by deducting from the total value of corporate assets all the intangible and tangible property not part of, or con- nected with, the special franchise." SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 159 Mr. Fiero admitted, in the conclusion of his report, the leeway the proposed method left to the tax commis- sioners, particularly in determining the value of the good will, conduct of the business, franchise to be a corpora- tion, and the value of the intangible franchise not tax- able. It was impossible, he thought, to adopt rigid rules of valuation for property the value of which depended on so great a variety of elements. Such rules could only be general in character and must be subject to modifica- tion in individual cases. Because of the wide discretion necessarily vested in the assessing officers, absolute cer- tainty in values would not be possible. The Board of Tax Commissioners had to contend at first with many difficulties, and to encounter much criti- cism. Frequent inquiries were made as to what rule was followed in making a special franchise assessment and the reply that it was impossible to use any one rule was naturally not deemed satisfactory. The Board, in fact, found it next to impossible to perform the duties requir- ed of it. The task of placing a value upon every rail- road and trolley crossing, and every use of the streets and highways by other public service corporations in- volved an enormous amount of labor. In order to facili- tate assessments the legislature, at the request of the board, eliminated from the special franchise class all uses of public thoroughfares less than 250 feet in length.^* This reduced the number of special franchise assessments by about 11 00 and the valuation by more than $10,000,- 000. But it was not long before the Tax Commissioners pointed out the enormous value attached to short cross- ings in populous centers, and asked that the amendment be modified. The 250 feet exemption reduced the rev- enue and involved an unjust discrimination.^'^ The leg- islature accordingly included in special franchises all uses of public thoroughfares in cities and incorporated villages and placed the assessment under the jurisdiction of the State Tax Commissioners.^^ '" New York Statutes, 1901, Chap, 490. "Annual Report of Board of State Tax Commissioners, 1906. " New York Statutes, 1907, Chap, 720, 160 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK In spite of the difficulties in administering tiie tax, the commissioners approved it as a matter of justice and as a source of increased public revenues. Valuations of corporate properties were greatly increased. The total value placed upon the special franchises of New York City at the first assessment was nearly $290,000,000. The special franchises of some individual companies are found if> be enormously valuable. For the Metropolitan Street Railway system this value was over $55,000,000; for the Consolidated Gas Company, over $10,000,000; for the Third Avenue Street Railway system over $17,000,- 000. General approval, of course, attended such results of the law. This statute, however, has been the cause of an enor- mous amovmt of litigation. Values were, of necessity, arbitrarily determined ,and this opened the door for com- plaints. The constutionality of the law was first attacked. In 1903 the Court of Appeals defined a special franchise as "the right granted to a corporation to construct, min- tain or operate, in a public highway, some structure in- tended for public use, which, except for the grant, would be a trespass." It was contended that the home-rule provision of the constitution *^ was violated by placing the assessment of special franchises in the hands of the State Tax Commissioners. This contention was reject- ed by the court, which held that the statute created a new system of taxation, and brought within its range a new character of property which required new methods of val- uation. With this the exercise of new functions arose which had never belonged to local assessors. The func- tions were properly committed to state officers whose '" Article 10, Section 2. This provides that "all city, town and village officers, whose election and appointment is not provided for by this constitution, shall be elected by the electors of such cities, towns, and villages, or of some subdivision thereof, or appointed by such authorities thereof, as the legislature shall designate for that purpose." The court held that when this provision was invoked in relation to taxation it should be considered in connection with the supreme taxing power of the legislature and neither should be con- strued so as to embarrass or cripple the other. The right to create a new system of taxation and bring in property of a new character could not be decried upon this principle and should not be withheld from the legislature. SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 161 duty related to the subject of taxation in all its phases throughout the entire state and who, with wider experience and greater opportunities for observation than local asses- sors, would be able to grasp the new scheme of taxation as a whole. Such action, moreover, would be free from all local prejudices of color. Other contentions, to the effect that the act was impracticable and incapable of execution, and that this was evidenced by the failure of the commissioners to adopt a definite rule in making the assessment, were likewise overruled.-" A number of cases involving the methods used in making the assessments have come before the courts. That of the Jamaica Water Supply Company was the most important. We have already noted the method suggested by the court for valuing corporate property.^^ The net earnings basis, it will be remembered, was adopted. To determine the value of a special franchise the court would have the assessors first deduct operating expenses from gross earn- ings. A reasonable return upon the portion of the capi- tal invested in tangible property was also to be deducted. The capitalized remainder would represent the value to be attributed to the special franchise. Taxes, except the special franchise tax, were to be deducted from gross earnings in determining net earnings as well as a proper amount of depreciation. In absence of evidence to the contrary, six per cent was to be taken as a fair rate of return in calculating the value of a special franchise. The court recognized that the rule was not infallible, but thought it could be generally applied. If the calculations left no value for the special franchise, it would be con- clusive reason for rejecting the net earnings rule and would demand the adoption of some other method of val- uation. It appears, that in laying down this rule, the court took no account of the fact that other franchise values besides the special franchise have to be reckoned with. The other franchises, to be sure, are not taxed locally yet the total ''Metropolitan Street Railway Company vs Tax Commissioners, 174 N. Y., 417. Affirmed 199 U. S., 1. " Jamaica Water Supply Company vs Tax Commissioners, 196 N. Y. 39. See preceding chapter, p. 134. 162 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK value of all franchises cannot properly be imputed to the so-called special franchises. The rule suggested gives at best merely the whole franchise value and suggestes no scheme by which the assessment can be divided into sums representing the values of the different kinds of franchises. Neither does it suggest any method by which the value of one special franchise may be separated from the value of other special franchises. A railroad company, for ex- ample, may have special franchises in a number of tax districts and it is necessary to assign separate values to the franchises in each district. It would seem, then, that the suggested rule fails to solve the problem of special franchise assessment, and that as much leeway as before is left to the tax commissioners. Judge Blackmar, in a later case,-" discounted the im- portance of the net-earnings rule in special franchise val- uations. He admitted, of course, that the most important single element in determining the value of a special fran- chise is the earning capacity of the company. But no thoughtful appraiser, he held, would deem the results of the business for a single year conclusive without a con- sideration of many other matters. The real value of a special franchise does not depend upon what it does earn, but upon what it can be made to earn. This would be the way a person who contemplated purchase would val- ue it. Here, then, we have another basis, one which the judge himself characterizes as attended by too many com- plications to be of direct practical use. This factor, how- ever, he thought should be given due weight. That none of the methods used were altogether satisfactory is indi- cated by the number of cases that continued to come be- fore the ciiurts. The corporations were severely, and perhaps unfairly, criticized for contesting the law. The hidepcndcnt at- tributed the opposition of the "interests" to Roosevelt's second term as governor to this law. "But his franchise tax law," it said, "was so strongly affirmed that it could not be shaken, and efforts to escape its requirements will ''Queens County Water Company vs Woodbury, 67 Miscellan- cou';, 490. SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 163 do the companies more harm than good. The tax is clearly a just one. Great quantities of stock and bonds have been issued upon franchise privileges rather than upon actual cash. By means of such manipulation large fortunes have been acquired." To such practices it at- tributed the clamor for municipal ownership of public utilities.^* Such were the opinions of the press generally, which seems to have endorsed Roosevelt's statement that the principle had come to stay. Governor Odell, however, favored the repeal of the law because of its indef initeness and the consequent litigation. He recommended the gross earnings tax as a substitute.^* One obvious defect in the law was its failure to pro- vide for the equalization of assessments, which had to be made by the board at full value. In the Jamaica Water Supply Company case, cited above, the court held that the State Board of Tax Commissioners had no power to reduce the value of a special franchise for purposes of equalization. Reduction could only be made by the courts where such property had been assessed at higher proportionate value than other property on the same tax roll. During the first eight years that the law was on the books, less than half the taxes due on special franchise assessments were paid, pending the outcome of legisla- tion. The Tax Commissioners had from the first asked for the power of equalization and the Court of Appeals had recommended that such power be conferred. The State Conference on Taxation held in Utica in 191 1 unanimously adopted a resolution recommending the equalization of special franchise assessments by the State Board. Governor Dix in his message of 191 1 referred to the enormous amount of litigation and asked for an amendment that would permit the tax commissioners to make an equalized assessment. Such an amendment to the law was finally passed in 191 1.^^ The State Board "^ The Independent, May 7, 1903. =" Governor Odell's message to the Legislature, 1903, Public Papers of Governor Odell, 1903, p. 12. ''New York Statutes, 1911, Chap. 804. 164 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK now attempts to equalize special franchise assessments with real estate assessments in each district. In 191 1, 975 writs of certiorari were taken out in the courts for the review of special franchise assessments. In the following year, with the amendement in force, the number fell to 212. But this number is so large as to indicate that the operation of the law is still far from sat- isfactory. Cities and towns have begun action in cases where they thought the Commissioners under their equal- ization powers had unduly reduced special franchise val- ues. The possibility of inequality still exists in the at- temp to equalize the special franchise value to the per- centage which the assessed value of other real property in each district bears to its full value. It is difficult for the commissioners to determine just what is the relation between the assessed and full value of other real prop- erty in the various districts. The board of tax commissioners expressed the hope that the equalizing of the special franchise valuations would largely aid in bringing local assessments of real property up to the full value standard. The reduction of the special franchise valuations^® brought forcibly to the attention of the people the rate at which real property was generally being assessed, and the loss that came to the particular tax district by reason of assessments being lower than full value. When an adequate force of ap- praisers was supplied, the Board expected to be in pos- session of sufficient information to make plain to the as- sessors the extent to which they were violating the law. The Commissioners recognized that the assessments in many localities were unequal, but they lacked positive proof of such inequalitity and undervaluation. Taken as a whole, the statute has proved in operation to be one of the most arbitrary and complicated parts of New York's already far too complex system of taxation. The different methods and "rules" suggested for valuing the franchises, and the admitted impossibility of framing " As given by the tax commissioners in their report for 1912, the total valuation of special franchise for 1912 was $601,988,675 and the equalized valuation was $533,790,692. SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 16S a "rule" fitting all cases, points to the conclusion that the fair and equitable assessment of special franchises is an impossibility. The net earnings basis of valuation and its difficulties have been discussed in the previous chap- ter. Just what are net earnings ? What shall be allowed for expenses in each case, and how shall the rate of capi- talization vary for the companies operating under differ- ent conditions of hazard? What has been the chara,cter of the management in this or that particular case and what allowance must be made for managerial ability in making the assessments? Railroads in the streets are a greater hinderance to public use than are gas mains, tel- ephone conduits, etc., and yet there are many cases in which larger profits must be imputed to the latter. Are the commissioners to use the same rule and basis of cap- italization for all companies? How much of the earn- ings is to be attributed to property located outside the streets? Are the prices which some corporations pay municipalities for their franchises, either in a lump sum or annually, to be taken into consideration? What part shall the fee value of the land itself occupied in the streets have in the assessment ? What place must be given to the possibility for future earnings? How determine the value to a railroad company of the right to cross the street in a country village of looo population? Problems such as the above questions suggest and many others arise under the application of the law, and with a slightly different application in each case. And when we consider that there are nearly 8000 special fran- chises annually to be assessed and equalized with the as- sessed value of other real estate in the district where the franchise is situated, we must grant the utter impossibility of satisfactory results. Instead of making the tax sys- tem more simple and uniform, as had been urged by the reformers, it has piled complexity upon complexity. It has increased revenues in some places, but at a waste of time and money in administration and litigation. And all this has not afforded uniform and just treatment to the corporations, for under the statute it is virtually im- possible to treat all alike. The assessment must be arbi- 166 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK trary and the companies have no way of knowing in ad- vance how much their taxes will be. It also increases the burdens connected with the mere payment of the taxes. That such burdens are not inconsiderable is shown by the fact that some corporations pay as many as 5000 separate tax bills. But was there really no justification for the measure? It was, of course, an attempt to make the property basis of taxation more adequate in reaching corporate value. The people saw companies which held gratuitous long- time or perpetual franchises and from which they were coining money, and on which they were paying little or nothing in taxes. The very idea of the public franchise, in so far as it means a franchise to serve the public, seem- ed to be forgotten, and the idea that such a franchise conferred the right to exploit the public seemed to be in vogue. And in a number of cases there were facts which went far to justify such an interpretation of the situation. It was to have been expected, of course, that franchises granted by the public without special safeguards for the public interests would be exploited as they were. When the people realized the value of these special grants and sought to correct the evil they had brought upon them- selves, no weapon seemed so readily available as taxation. If the special franchise tax cauld be made to take the earnings of exploitation and be kept uniform and fair in its application, there could be little objection to it. But even though we justify the special franchise tax as an attempt to take the "earnings of privilege," the difficulties are not cleared away. It still remains to account for the "additional franchise taxes" upon the gross earnings and dividends of some classes of public service corporations. Then, too, the inadequacy of the annual franchise tax to reach intangible values, in the cases where it applies, must be explained. The modern interpretation of the idea covered by the term "public franchise" is not that the franchise gives a corporation the right to use public property for the pur- pose of gaining an income from it. It is rather a priv- ilege granted to the corporation to use such property in SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 167 rendering a public service. The service is not expected to be rendered without compensation and the pubhc must allow a reasonable return on the capital used to render such services, but not on the value of a free gift from the public. A public franchise cannot be capitalized against the public. But, in fact, many corporations were getting more than the public was willing to allow and the tax- ation of surplus profits was the first remedy hit upon. More recently, however, a better and saner method of establishing just relations between the public and the cor- porations has been introduced. This is regulation by a public service commission. This commission has the board powers of deciding upon a fair return on capital invested, quality of service, and the rates to be charged. Under regulation the values now represented by special franchises tend to disappear. If regulation were perfect there would be no special franchise values. Since it can thus deal with the use of franchises, the question of tax- ation resolves itself into this : are public service corpo- rations to be viewed as existing for the benefit of the users, the community viewed as a body of taxpayers, or both? If for the former then the commission will require low rates, and there will be nothing left (over a fair re- turn) for taxes; if for the state, then higher rates with some curtailment in the use of the utility ; if for both, moderate rates with only a moderate surplus for taxes. Under a system of perfect regulation there is no doubt that, if the public service corporation pays a tax, it mere- ly acts as a collector of that tax from the public. The net earnings of a company must be large enough to allow a fair return. In ascertaining the net earnings, taxes, along with the operating expenses, are deducted from gross re- ceipts. If there were no tax the total income of the com- pany could be reduced by the amount of the tax and their net earnings remain unchanged. With the tax the charge for service must be such as to allow a fair return after its deduction from gross receipts.^'' For this reason many ""This is only necessarily true under regulation. A tax imposed upon a monopoly where prices were fixed so as to bring the highest net return might have no effect, or one not in proportion to the tax, on the price charged for the service. Rates would still be such as 168 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK persons now favor the abolition of special taxes upon pub- lic utility corporations for these increase the burden upon the consumer of the service. Such taxes are, more or less, according to the utility in question, a burden upon a particular class. A tax upon street railways, for ex- ample would be borne in large part by the middle and lower classes. In the case of some other utilities, steam heat or gas, for example, the opposite may be more nearly true. Because of the necessary burden a tax places upon the consumer of a public utility service, some have advocated the entire abolition of taxes upon this class of enterprises. Such action would secure cheaper services but at a high- er tax upon other assessable property. It would practi- cally amount to shifting such tax to the owners of other property. Under regulation, public utility property becomes much like other property so far as a means for raising revenue is concerned. It is property yielding a fair return, and so should neither be freed from taxes nor have special taxes applied to it. The most logical and just method of procedure, it would seem, would be to tax such property valuations to the same extent that other property is tax- ed, and in such a way as to equalize the burdens on this class of property and other property. The proceeds could be applied to the needs of the state, the locality, or both. Such a tax, however, should not be assessed under the guise of a special franchise tax, for this has proved com- plex and confusing. We conclude, as in the preceding chapter, that the present system should be simplified into some uniform tax, assessed by a central board. Some in- equalities, no doubt, would exist until proper regi.ilation and as.sessment is secured. Such, however, would tend to disappear with time and experience. Simplicity would at least be secured and no greater injustice or inequalities would be incurred than exist at present. to bring the largest net return to the company, and it is possible they would remain the same as before the tax was imposed. CHAPTR IX. SUMMARY OF NEW YORK LAWS TAXING CORPORATIONS. I. FOR STATE PURPOSES. A DOMESTIC CORPORATIONS. Organization Taxes (Section i8o) Every stock cor- poration incorporated under any state law must pay a tax of one-twentieth of one per cent upon the authorized cap- ital stock. A like tax is imposed upon any subsequent increase of capital stock. The minimum tax is five dol- lars. Banks, building, mutual loan, accumulative fund and co-operative associations are exempt from the tax. Railroads need not pay when incorporated but must pay before they receive a certificate from the public service commission. In case of consolidation the tax must be paid only on the capital in excess of the amount which has previously borne the tax. Annual Franchise Tax. (Section 182) Every cor- poration, joint stock company, and association, for the privilege of exercising its corporate franchise, must pay an annual tax on the amount of capital employed within the state during the preceding year. The amount of stock employed within the is the same proportion of the issued stock as the gross assets employed in the state bear to the entire gross assets. If the dividends amount to six or more per cent upon the par value of the stock the lax is one-fourth mill for each per cent of dividend so de- clared. If the dividends amount to less than six per cent and (a) the assets do not exceed liabilities, exclusive of cap- ital stock, or (b) the average price at which the stock sold did not equal or exceed par, or (c) if no dividends were declared, the tax is three-fourths mill per dollar on capital employed in the state. If the dividends have been 169 170 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK less than six per cent and (a) the assets exceed liabiHties cxchisive of capital stock, by as much as the par value of the stock or (b) the average selling price of the stock during the year was as much as par, the tax on capital employed in the state is one and one-half mills per dollar. The valuation of the capital cannot be less than (a) the par value of the stock, (b) the difference between assets and liabilities, exclusive of capital stock, or (c) the aver- age price at which the stock sold during the year. Where there are two kinds of stock paying dividends at different rates, each kind of stock is taxed as if it were the only taxable stock. Any corporation not taxable under the abc)\'e provisions is taxed not less than would be produced by a tax of one and one-half mills per dollar on the actual value of the capital stock employed in the state or on the average price at which stock sold during the year. Some corporations are exempt from the annual fran- chise tax. (Section 183) These are banks, savings banks, institutions for savings, title guaranty, insurance or sure- ty corporations and trust companies. Laundering, manufacturing and mining companies are exempt if at least forty per cent of the capital stock is invested in prop- erty in the state and used in laundering, manufacturing or mining business. Agricultural and horticultural as- sociations and companies owning or operating elevated railroads, surface roads not operated by steam, and com- panies formed for supplying water or gas, for electric or steam heating, lighting and power purposes are also ex- empt from the tax. Additional Franchise Tax : (Section 184) All steam surface railroad companies and all canal, steamboat, ferry, express, navigation, pipe line, transfer baggage express, telegraph, telephone, and palace or sleeping car compan- ies must pay an annual excise tax or license fee of five tenths of one per cent upon gross earnings within the state. The earnings considered are those arising from business originating and terminating within the state. Earnings from interestate commerce are therefore exclud- ed. Ferry companies operating between the boroughs of SUMMARY NEW YORK LAWS TAXING CORPORATTONS 171 New York city under a city lease are not subject to the tax. Other Taxes on Transportation and Transmis- sion Companies: (Section 185 and 186) Companies owning or operating elevated railroads or surface roads not operated by steam must pay an annual tax of one per cent on gross earnings derived from all sources within the state. In addition they must pay three per cent upon the amount of dividends declared or paid in excess of four per cent on the actual amount of paid up capital employed. Companies formed for supplying water and gas or for electric or steam heating, lighting or power purposes, must pay an annual tax of five-tenths of one per cent on gross earnings derived within the state. Besides this they must pay a tax of three per cent upon the dividends declared in excess of four per cent on the actual amount of paid up capital. Insurance Companies: (Section 187) All insurance companies organized or formed under a general or special law of the state must pay a tax of one per cent on the gross amount of premiums received during the year. The gross premiums include all premiums received on all poli- cies, certificates, renewals, policies subsequently canceled, insurance and reinsurance during the preceding year, and on all policies issued in all years prior to the preceding year. Trust Companies and Savings Banks: (Section 188 and 189) Every trust company operating under any law of the state must pay for the privilege of carrying on its business in such organized capacity an annual tax of one per cent on the amount of its capital stock, surplus and un- divided profits. Savings banks must pay for the privilege of exercising corporate form, an annual tax of one per cent on the par value of surplus and undivided earnings. Stock Transfer Tax: (Section 270) A tax of two cents on every $100 face value is imposed on all sales or agreements to sell or memoranda of sales of stock. The person making the sale must affix and cancel the stamps to pay the tax. Stamps are prepared by the State Comp- 172 DEVELOPMENT OF CORPORATION TAXATION^ STATE OF NEW YORK troller and their sale is limited to banks organized under the New York laws, under the national banking act or to a duly authorized agent of the Comptroller. Penalties are imposed for failure to pay the tax, failure to cancel stamps, illegal use of stamps and for failure to register. B. FOREIGN CORPORATIONS License Tax: (Section i8i) Foreign Corporations, for the privilege of carrying on business in a corporate capacity in the state must pay a license fee of one-eighth of one per cent on the amount of capital stock employed within the state during the first year of carrying on busi- ness. Any subsequent increase of capital employed in the state is subject to the tax. The amount of capital employ- ed in the state is taken to be such part of the issued capital stock as the gross assets employed in any business within the state bear to the total gross assets. The State Tax Commission fixes the amount of capital upon which the tax is to be paid. Banking corporations, fire, marine, casulty and life insurance companies, co-operative fra- ternal insurance companies and building and loan associa- tions are exempt from the tax. Annual Franchise Tax: (Section 182) Foreign corporations pay the annual franchise tax on the amount of capital employed in the state. The tax is computed in the same way as the tax on domestic corporations. The amount of the stock upon which to compute the tax is de- termined by the proportion of assets found in the state. Foreign Insurance Companies: (Section 187) All insurance companies formed under laws of any other state of the United States, except fire and marine insur- surance companies, pay one per cent of the gross amount of annual premiums. All insurance companies organized under laws of foreign countries, except those doing a life health or casulty business, pay one per cent on the gross amount of annual premiums. The tax on fire and marine insurance companies organized under the laws of a for- eign country, however, is five-tenths of one per cent of the annual premiums. If any state imposes heavier taxes SUMMARY NEW YORK LAWS TAXING CORPORATIONS 173 Upon a New York company than normally imposed in New York, companies from that state are taxed to the same extent as are New York companies during business there. Tax Upon Foreign Bankers: (Section 191) Every foreign banker doing business in the state is required to pay an annual tax of five per cent on the amount of inter- est or compensation earned or collected on money loaned, used or employed in the state. Other Taxes for State Purposes: All companies paying the above taxes , except the organization tax, are exempt from assessment and taxation upon their personal property for state purposes. (Section 205) Since there is a small directly apportioned tax for state purposes a part of this falls upon corporations since their real estate is legally assessed for state purposes. Very little personal property is assessed since proision is made only for plac- ing real estate and capital stock on the assessment roll. Ac- cording to the statute none of the locally collected tax. except real estate taxes, could be taken for state purposes. II. for local purposes ( Sections 1 1 and 12) Real estate and personal prop- erty of corporations is to be assessed and taxed by local assessors. Real estate is taxed at situs while persona! property is taxed at the place of the principal office. In the instructions for making out the assessment roll, how- ever, provision is made only for placing on the roll real estate and capital stock. Taxation of Banks: (Section 24) Bank shares are to be assessed to the holder at the place where the bank is located. The assessment and taxation is not to be at a greater rate than is made or assessed on moneyed capi- tal in the hands of individual citizens of the state. The value of shares is found by adding together the amount of the capital stock, surplus and undivided profits and dividing the result by the number of outstanding shares. When a bank is in liquidation the value is found by divid- 1 74 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK ing the actual assets by the number of shares. Individual bankers must report the amount of capital invested in the business and have it assessed as personal property. The tax upon bank shares is one per cent of the value. No deduction is allowed for the personal indebtedness of the share holders. Special Franchise: (Sections 43-49) The use of public property to the extent of 250 feet or more in length, and any use in a city or incorporated village, is assessed and taxed as real estate. Valuations are made and equalized by the State Board of Tax Commissioners. Taxes which companies already pay for the use of public property are deducted from special franchise assessments. 175 A PARTIAL LIST OF SOURCES USED IN PREPARING THIS THESIS. Annual Reports of New York State Comptrollers, 1847-1915. Annual Reports of New York State Assessors and State Board of Tax Commissioners, 1873-1915. Annual Reports of Commissioner of Taxes and Assessments of New York City, 1877-1915. Annual Reports of New York Superintendent of Banks, 1875- 1905. Annual Reports of New York State Attorney General, 1880- 1915. Annual Reports of New York Tax Reform Association. Adams, T. S. — Address before the Association of Life Insur- ance Presidents, Chicago, 1910. Andrews. Speech before the Ways and Means Committee, Oct. 6, 1874. Coleman. Special Franchise Taxation in New York. State and Local Taxation, I. 649. Corbin. Taxation of Mercantile and Manufacturing Corpora- tions. State and Local Taxation, III, 309. Cowdin. Speech in Assembly, April 11, 1877. (Reprint.) Cox. Taxation of Life Insurance Companies in the United States. State and Local Taxation, II, 363. Dryden. Addresses and Papers on Life Insurance and Other Subjects. Newark, N. J. 1909. Fairchild. Taxation of Banks and Trust Companies. National Conference on Taxation, Buffalo, 1901, 52. Fiero. Opinion Submitted to the Tax Commissioners, 1889. Foote. Taxation of Railroads in the United States. State and Local Taxation, V, 193. Foote. Taxation of Public Service Corporations. National Conference on Taxation, Buffalo, 1903, 55. Ford. The Ford Tax Bill. Municipal Affairs, VI, 861. Ford. Municipal Government in the United States. North American Review, Vol. 172, 861. Fryer. The Excessive Taxation of Insurance Companies. Nat- ional Conference on Taxation, Buffalo, 1901. 170. Hall. The Special Franchise Tax. First New York Conference on Taxation. 177. Hoffman. Taxation of Life Insurance Interests. National Con- ference on Taxation, Buffalo, 1901. 146. 176 Holcomb. The Assessment of Public Service Corporations. State and Local Taxation, V, 149. Huebner. Taxation of Life Insurance Companies. State and Local Taxation. I, 595. Judson. Taxation of Quasi Public Corporations. Publications of American Economic Association. 1901. 101. Kernan. Assessment of Manufacturing Corporations. First New York Conference on Taxation. 110. LeBoeuf. Corporate Tax Problems. Fourth New York Con- ference on Taxation. 342. Maltbie. Taxation of Public Service Corporations. State and Local Taxation. II, 477. New York Statutes, 1803-1915. New York Court of Appeals Decisions. New York Supreme Court Decisions. New York Times, 1865-1913. New York Tribune, ,1870-1913 New York State Assembly Documents. 1850-1915. New York State Senate Documents. 1850-1915. New York Governors' Messages. (Senate Documents and Pub- lic Papers of the Governors.) Noel. The Taxation of Insurance. State and Local Taxation. I, 149. Plehn. Taxation of Public Service Corporations. State and Local Taxation. I, 635. Report of New York Special Tax Commission, 1871. Report of New York Special Tax Commission, 1907. Report of the New York Special Tax Commission. 1900. Report of the Joint Legislative Committee Taxation of the State of New York. 1916. Reports of the Wisconsin Tax Commission. 1898-1910. Report of the New York Public Service Commission. Second District. 1913. Vol. III. Report of the Connecticut Special Commission on Taxation of Corporations. 1913. Report of Virginia Joint Committee on Tax Revision. 1914. Report of Nebraska Special Commission on Revision in Taxa- tion. 1914. Report of Michigan Commission of Inquiry into Taxation, 1911. Schwab. History of New York Property Tax Publications of American Economic Association. Vol. V. Seligman. Essays in Taxation. New York. 1913. Seligman. Assessment and Taxation of Corporations. First New York Conference on Taxation. 198. Seligman. The Special Franchise in New York. Review of Reviews. Vol. 29, 516. Seward. Taxation in New York. National Conference on Taxa- tion. Buflfalo, 1901. 116. 177 Shields. Railway Taxation. State and Local Taxation. II, 263. Shields. Railroad Taxation Problems. State and Local Taxa- tion. IV, 231. Shortt. Taxation of Public Service Corporations. State and Local Taxation. I, 622. Smith. State Systems of Corporate Taxation. State and Local Taxation. V, 139. Sowers. Financial History of New York State. New York 1914. Sullivan. Taxation of Domestic and Foreign Corporations. Fourth New York Conference on Taxation. 322. Sutro. Taxation of Competitive Industrial Corporations. State and Local Taxation. I, 605. Swan. Imperial Taxation. Annals of the American Academy of Political and Social Science. September, 1907. Taylor. Taxation of Telephone Companies in the State of New York. State and Local Taxation. The Outlook. May S, 1906. The Independent. May 8, 1913. The Independent. May 7, 1903. The Nation. February 1, 1900. United States Supreme Court Decisions. Whitten. Valuation of Public Service Corporations. New York, 1912. Zarttnan. Address before the Second Annual Meeting of the Association of Life Insurance Presidents. New York, 1908. Zarttnan. Yale Readings in Insurance. New Haven, 1909. ^i*c^ ^^«^p^ jt'^iM^M*^ ^: