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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: Zoller, James Frank Title: Taxation of business corporations PI3.C©' [Schenectady, N.Y.] Date: [1916] MASTER NEGATIVE « COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED • EXISTING BIBLIOGRAPHIC RECORD BUSINESS Y7 ZoUer, James Frank, 1878- Taxation of business corporations ; address by J. F. Zoller ... before the thirteenth annual convention, Eeal estate association, state of New York, at Long Beach, ' L. I October 19-21, 1916. fSdienectady, N. Y., Printed by the Magua company, 1916j 1 p. 1., 27 p. 23*. 1. Corporations— Taxation. .2. Taxation— New York (State) i. Title library of Congress Copy 2. HD27S3.U7N79 16-24100 RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: ^^^^ DATE FILMED TRACKING # : REDUCTION RATIO: f IMAGE PLACEMENT: lA IB IIB INITIALS FILMED BY PRESERVATION RESOURCES, BETHLEHEM, PA. en 3 X s| ^ o '5 30 N CO IV) ^ ■(^ 00 IM U1 3 3 03 Q) O o m (DO OQ X N X IM i 3 3 1^ |g IH Is 2.0 mm ABCOEFGHIiKUMNOPQRSTUVWmVZ atede^iiWmnopqfsluMnyzl234S67890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567B90 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 4^ ..AT o -o m n oil "O I TJ ^ p 00 "CO 5 > 3D O m A* 4fv en 3 3 ix I 00 Nl 8 1^ l>0 O 3 3i ^2 00 tM 8 ■ ) IT' i! Ivor- TAXATION OF BUSINESS CORPORATIONS f ■ Ik LIBRARY Sdiool of Btisiness S041422< T TAXATION OF BUSINESS CORPORATIONS Addnss by J. F. ZoUer, of Schenectady, N. Y., before the Thirteenth Annual Convention, Real Estate Association, State oj New York, at Long Beach, L I., October 19-21, 1916. - *» i »*,»»•»»•<• J • • t , ,•">•»•••« > lai !i I ••>» ji ! J i « • * I « > • t • • > • m * » • t » » t 1^1 /-i P3 nr^ r v»* "*■** - r— n Taxation of Business Corporations The theme of this paper is the need of changes in the present tax law for the purpose of properly taxing the personal property of busi- ness corporations in the vState of New York, so that such capital may continue to come here and remain here, and at the same time bear its just proportion of the taxation burden of the State. In order to fully realize the need of fundamental changes in the tax law relating to taxation of personal property of business corporations it seems neces- sary to consider briefly some of the provisions of the present tax law, some of the tax bills offered at the last session of the legislature and some of the methods adopted in an attempt to properly administer the present law. TAXATION OF PERSONAL PROPERTY We will first refer briefly to the provisions of the tax law concern- ing the taxation of personal property. TAXATION OF PERSONAL PROPERTY OF DOMESTIC CORPORATIONS Section 12 of. the tax law provides as follows: "The capital stock of every company liable to taxation, except such part of it as shall have been excepted in the assess- ment roll or shall be exempt by law, together with its surplus profits or reserve funds exceeding ten per centum of its capital, after deducting the assessed value of its real estate, and all shares of stock in other corporations actually owned by such company which are taxable upon their capital stock under the laws of this State, shall be assessed at its actual value." While the section refers to "capital stock" the courts have held that "it denotes the property owned by the corporation, and not the par or actual value of the shares of the stockholders." (People ex rel. Second Ave. R.R. v. Barker, 72 Hun, 126; Oswego Starch Factory v. Dolloway, 21 N. Y. 449; People ex rel. Panama R.R. v. Com'rs. 64 How. Pr. 405.) It therefore follows that the provision provides for the taxation of the personal property of domestic corporations and includes as personal property, the difference, if any, between the actual value and the assessed value of the real estate. If, however, the corporation has a surplus it may deduct such a proportion of such surplus as does not exceoi io% of the issued capital. There are many objections to this section, among which are the following : (a) The difficulty in making an assessment under the section due to the complexity of the method adopted. Innumerable decisions have been rendered under this section and the average assessor can hardly be expected to be familiar with such decisions or to fully apply such decisions in making an assessment of personal property under such section. (b) The ease by which the section may be evaded by corpora- tions desiring for any reason to escape taxation upon personal property. Corporations can avoid assessment of their personal property under such section by issuing sufficient bonds to offset all the other property considered under the section in ascertaining the taxable value. They may also materially reduce the amount of tax payable under the section by locating their principal offices in rural localities where the tax rate is low, thereby escaping all personal property taxation in the district where the business is actually transacted and where the personal property is actuaUy located and protected and where the tax ought to be paid. (c) The discrimmation against those corporations that desire to transact business without debts, and to pay their just proportion of the tax burden in the tax district where their business is transacted. It should be noted that this section contemplates a full assessment upon all personal prc^rty both tangible and intangible, plus the differ- ence, if any, between the actual and assessed value of the real estate, such property to be taxed under the section at the general prc^erty rate. As there is no analogous rule provided in the tax law for the assessment of such property owned by foreign corporations, individuals or copartnerships, as we shall hereafter see, the section necessarily discriminates against domestic corporations, unless they see fit to resort to the tax-dodging method of locating their principal office in some out-of-the-way neck of the woods, or go in debt Therefore, a the very corporations which are of the most benefit to the State and which should be encouraged to locate in the State are discriminated against under the section. TAXATION OF PERSONAL PROPERTY OF FOREIGN CORPORATIONS Section 7 of the tax law provides as follows : "Non-residents of the State doing business in the State either as principals or partners, shaU be taxed on the capital invested in such business, as personal property, at the Place where such business is carried on, to the same extent as if they were residents of the State." It should be noted that there is no specific provision for the taxa- tion of the personal property of foreign corporations, but the f oregonig provision applying to non-resident individuals generally has been con- strued so as to apply to the property of foreign corporations mvested in business in the State. (International Banking Co. v. Raym^d 117 App. Div. 62 ; People ex rel. Rurand Ruel Co. v. Wells, 180 N. Y. 505; People ex rel. Farcy & Oppenheim Co. v. Wells, 183 N. Y. 264.) TAXATION OF PERSONAL PROPERTY OF INDIVIDUALS Section 6 of the tax law provides as follows: "AH real and personal property subject to taxation shall be assessed at the fuU value thereof, provided, l^owever, that S^eTwner of persomil property shall be allowed a deduction from the full value of all his taxable personal property to the extL of ^e just debts owing by him but no such deduction shall be allowed by reason of the indebtedness of the owner con- tlLcted or incurred in the purchase of non-taxable property or securities owned by him or held for his benefit, nor for or on account of any indirect liabUity as suretv guarantor indorser or otherwise, nor for or on account of any debt or liabihty con- tracted or incurred for the purpose of evading taxation. Section 8 of the tax law provides : "Every person shall be taxed in the tax district where he resides * * * for all personal property owned by hun or under his control as agent, trustee, guardian, executor and administrator * * * 3 TAXATION OF PERSONAL PROPERTY OF COPiillNERSHIPS There is no provision in the tax law for the taxation of copart- nerships as such. The personal property of copartnerships can be taxed only to the different individuals composing the copartnership. REPORTS TO LOCAL ASSESSORS IN CONNECTION WITH ASSESSMENT OF PERSONAL PROPERTY Individuals, copartnerships and foreign corporations are not re- quired to make any report whatever to local assessors in connection with assessments of personal property under the tax law. Domestic corporations, on the other hand, are required to make the report to local assessors prescribed by Section 27 of the tax law. Such section reads as follows : "The president or other ])roixM- officer of every moneyed or stock corporation derivinj^ an income or profit from its capital or otherwise shall, on or before June first, deliver to one of the assessors of the tax district in which the company is liable to be taxed, a written statement in the form prescribed by the tax commission specifying: "(i) The real ])ro])ertv, if any, owned by such company, the tax district in which the same is situated and, unless a rail- road corporation, the sums acttiallv paid therefor. "(2) The capital stock actually paid in and secured to be paid in, excepting therefrom the sums paid for real property and the amoiint of such capital stock held by the State and by any incorporated literary or charitable institution, and "(3) The tax district in which the principal office of the company is situated, or in case it has no principal office, the tax district in which its operations are carried on," If such statement is not made within twenty days after the first day of June or is insufficient, evasive or defective, the assessors may compel the corporation to make a proper statement by mandamus. Section 28 of the tax law provides a penaUy of $250 for wilful neglect to furnish such report. ' This is the only form of report required by law in connection with the assessment of personal property by the local assessors. It should be noted that this report requires three things only to be stated, viz. : (a) The amount and location of the real property and the sums paid therefor. 4 (b) The amount of paid-up capital stock. (c) The location of the principal office. At the last session of the legislature an amendment was offered to the tax law, giving the State Tax Commission power to prescribe the form of report which should be made by corporations for the purpose of an assessment under Section 12 of the tax law. The result of this report undoubtedly would have been a full assessment of corporations under Section 12 of the Tax Law and a full discrim- ination against those corporations before referred to who had not created debts and had located their principal office in the district where their operations were carried on. This bill did not become a law. After the close of the legislative session last year there was pre- pared and forwarded to the assessors throughout the State by the State Tax Commission a certain letter of instructions dated April 28, 1916. Such letter was as follows : April 28, 1916. "To the Board of Assessors: "You are about to begin your field work in the assessment of property in your tax district. In line with the duty imposed upon the State Tax Commission by the Tax Law of the State we urge you to obey the law, particularly in the requirement that all property shall be assessed at full value. "Do your full duty under the law ! "Don't copy the old roll or follow tiie old methods ! "Do make a real assessment roll to which you can append your conscientious oaih ! "Don't permit your district to be the one in which the law is not observed ! • "Organize a County Assessor's Association and agree on above plan in your County ! "In most cases under-valuations result in discrimination in favor of the large property owners and against the smaller ones. All should be treated exactly alike. You should not be concerned with other tax districts, for the State Tax Commission is making every effort to bring about much needed reforms in all of the tax districts of the State. There will be no direct State tax this year, so that the question of putting property on the full value basis is almost entirely a local one. If you make low assessrnents you will have a high rate of taxation, and one result of this will be the failure to assess any personal property, and real estate will bear the entire burden. "Your particular attention is also called to the assessment of stock of corporations liable under Section 12 of the Tax Law. Every such corporation which has its principal place of business in your tax district should be assessed upon its capital stock bv 5 you. To make an effectual assessment, assess every such corpo- ration at an amount equal to its capital share stock, except cor- porations which you have been assessing at a valuation higher than the par value of their capital stock. When a corpo- ration objects to your assessment have it file a sworn statement upon the blank which this department will furnish you for such purpose. Cities may use their own blanks, if they have them, until further orders from the Commission. If a corporation doing business in your tax district claims that its principal place of business is in another tax district, kindly notify the assessors of that district so that thev mav assess that corporation there ; also notify the State Tax Department to the same effect. "Please call this communication to the attention of your col- leagues. Very truly yours, "MARTIN SAXE, President; "WALTER H. KNAPP, "RALPH W. THOMAS, "State Tax Commission.'' The forepart of the letter referred to the assessment of property in general regardless of the character of the owner, and the assessor was urged to assess all property at full value. No rule, however, was suggested to enable the assessor to make a full assessment of all per- sonal property. Following these general instructions applicable to all property "particular attention" was called to the assessment of corporations under Section 12 of the tax law, and a rule was suggested to enable the assessor to make a full assessment of the personal property of domestic corporations. The rule prescribed for the assessment of the personal property of corporations under Section 12 was to assess every such, corporation at an amount equal to its capital share stock, except corporations which had been assessed at a valuation higher than such par value. The letter of instructions further stated : "When a corporation objects to your assessment have it file a sworn statement upon the blank which this department will furnish you for such purpose." The form of blank referred to follows : "OFFICE OF THE BOARD OF ASSESSORS. City or Town of County or Application for Revision of Assessment for year 191 6 Assessed pursuant to Section 12 of the Tax Law. The (Please state full name of the corporation.) a corporation organized under the laws of the State of New York, claiming to be aggrieved by the assessed valuation of its personal property for die year, makes application by the under- signed, one of die officers of the said corporation, to have the same revised and corrected. STATE THE VALUE OF THE FOLLOWING ITEMS : ASSETS All assets must be scheduled, whether located in the State of New York, or elsewhere, including deposits in banks and debts due from non-residents. 1. Real Estate $ 2. Machinery, plant, office furniture and fixtures other than real estate $ 3. Goods, wares and merchandise $ 4. All other tangible personal property (this does not include mortgages or credits) $ 5. Cash on hand and on deposit $ 6. Debts due from solvent debtors (this includes bonds and all credits, also ''secured debts") $ 7. Shares of stock of other corporations $ 8. Value at which patent rights, copyrights, trade- marks, good will and franchises were taken in payment for capital stock $ 9. The aggregate of the above assets $ DEDUCTIONS Except the items numbered 12, 15, 17 and 18, the value of every item to be deducted must be the sum at which it is included in the above statement of assets. ( U. S. Bonds, N. Y. State and Municipal Bonds $ N. Y. Mortgages recorded on or after July i, 1906, and mortgages on which a regis- tration tax has been paid since May 13, 1907, also "se- cured debts." (This includes only mortgages and "secured debts" owned by the corpo- ration) $ Goods imported by above corporation from foreign countries on hand in unbrok- < en original packages 10. Property exempt by law, which includes 11. Value at which patent rights, copyrights, trade- marks, good will and franchises were taken in payment for capital stock $- 12. So much of the surplus, if any, as shall not ex- ceed ten per centum of the par value of the shares of stock issued $- 13. Shares of stock of other corporations actually owned by the above corporation which arc tax- able upon their capital stock 14. Tangible personal property having a permanent situs outside of this State, specifying its nature and location. (This does not include bonds, notes, evidences of debt of any kind, currency, deposits in banks, bills receivable, or any other intangible property) • 15. The assessed value of the corporation's real estate in this State, including its special franchises $- 16. Real estate outside of this State, specifying its location ^ $- 17. Indebtedness secured by the corporation's bond and mortgage on real property to which corporation now holds title $- 18. All other indebtedness of the1 corporation not contracted or incurred in the purchase of non- taxable property or securities, or for the purpose of evading taxation. (The amount owing for goods imported by above corporation from f ordgn coun- tries on hand in unbroken orig- inal packages and the capital stock of the corporation must not be mduded.) Itemized as foflows: 19. The aggregate of the items set down in answer to questions 10 to 18, inclusive 1 Bonds not se- cured by mort- gage of real es- tate $- Notes $- Open Accounts-?. ADDITIONAL INFORMATION REQUIRED a. Total par value of capital stock issued $ b. Rate of last dividend Date — 8 c. Amount of surplus, if any as shown by the books $ d. Amount of indebtedness for above imported goods ; this amount is not included' in No. 18, but is in addition thereto $ Gross assets as shown by answer to question 9 $ Aggregate of deductions from gross assets as shown by answer to question 19 $ Subtract the deductions from the above assets $ Add "secured debts" upon which no registration tax has been paLd -$ The result is the Capital Stock liable to Taxation $ The principal office or the place of transacting the financial business of the said corporation is situated in the City or Village of Town of County of STATE OF NEW YORK. County of I, the of the said corporation, being duly sworn, do hereby certify that the foregoing is in all respects a just and true statement of the property and debts of the corporation on the first day of July, 191 The statement is in accord with the books of account of the corporation except as otherw^ise noted. Sworn to before me this day of 191 »» Notary Public. It would therefore seem that the purport of these instructions was for the assessor to make an arbitrary and excessive assessment against every corporation subject to assessment under Section 12, and then place upon the corporation the burden of getting such arbitrary assessment reduced. This illustrates the difficulty of administering the present tax law, and also the unfairness and discrimination that necessarily results in case it is possible to in any way administer the present law relating to the taxaticm of personal property of domestic corporations. The chief objection to this method of assessing the personal prop- erty of domestic corporations in an attempt to administer the present tax law would seem to be that it substitutes an arbitrary assessment 9 for a judicial assessment as contemplated by the tax law. This law contemplates that the local assessors throughout the State shall exer- cise quasi-judicial functions in making assessments. This fact is fully recognized by the present State Tax Commission. In its Manual of Instructions to Assessors issued in May, 1916, we find the following on page 13: "When completed the assessment roll should be the result of the deliberate, careful and conscientious judgment of at least two of the three assessors in each district." It is, of course^ impossible to get deliberate, careful and conscien- tious judgment, or any judgment at all, if under our tax law we find it necessary to resort to arbitrary assessments. This condition would seem to be a potent reason for the elimination of Section 12. FRANCHISE TAXATION Under Section 182 of the tax law certain business corporations are required to pay a franchise tax in addition to the tax prescribed by Section 12 of the tax law. Section 182 is exceedingly complicated, but the rate of tax thereunder in general depends upon the rate of dividend declared being one-fourth of a mill upon each per centum of dividends declared. The base of the tax, generally speaking, is such a proportion of the value of the issued capital stock as the prop- erty of the corporation in the State bears to the total property wherever located. This section has been very generally condemned by practically all individuals qualified to speak upon the subject, not only because of the complexity of the section and the confusion necessarily resulting in the administration of it, but also because of its unsoundness from a scientific and economic standpoint. Mr. John J. Merrill, at present a Deputy State Tax Commissioner, has undoubtedly had more experience in the administraticm of Section 182 of the tax law than any other individual. Mr. Merrill in speaking before the First State Conference on Taxation of the State of New York, held in Utica, N. Y., in January, 191 1, in referring to said section, said: "The taxation by the State of franchises of corporations, based upon their capital stock, as the law now stands smd as construed by the courts, constitutes a sadly mixed and inade- quate system. This is due to three concurring c(mdttions, 10 namely, (i) That the courts in construing this law in its earlier conditions held that as to domestic corporations the tax was based* upon their franchises, but as to foreign corporations it was a tax upon a business done and was measured by the actual amount of 'capital' employed, as distinguished from *cap- ital stock.' In the attempt to distinguish between and define 'capital' and' capital stock' some 'fearful and wonderful' results were attained, and in later years the effort to follow these earlier decisions has tended to lead us farther and farther mto the intricate mazes of doubt and disaster.'* Professor Edwin R. A. Seligman at the same Conference in dis- cussing the same law said : "But even in those cases where a precise rule is laid down, the rule is not by any means free from objection. Take,^ as an example, our so-called annual franchise tax on domestic and foreign corporations. Who does not know how we came, almost a generation ago, to copy a method that had been introduced shortly before in Pennsylvania? But I wondter how many know that when Pennsylvania came to look over the whole problem of taxation in a broad and comprehensive way, she chai^fed m most essential respects the plan which we have adopted, and which was found not to secure the justice and equality whicn they desired. Our annual franchise tax, with its complicated scheme of calculation, and with its utter disregard of bonded indebtedness, forms a method which has been practically aban- doned by our sister States. This is not the place to attempt the elaboration of the proper principle lliat should obtain in any comprehensive and uniform system of corporate taxation ; but this is the place to protest against the permanent continuation of antiquated methods, and it is the place to voice the demand for a movement which shall result, not only in the adoption of def- initeness and precision in lieu of arbitrariness, but for at all events some correspondence between administrative rules and sound economic prindples." Professor Seligman also referred to the same law in his work en- titled "Essays on Taxation," and in that woric he had this to say con- cerning Section 182: "The tax is assessed according to the capital stock. Orig- inally the rate was just one-half of that of the original Penn- sylvania protot)rpe. At present, however, the rate of tax is determined according to very complicated rules. In reality there are in New York no less than six different classes, although the rather confused law docs not clearly differentiate them.*' II Mr. Harrison WUlianis, Tax Agent of the Erie Railroad, in speaking upon the same subject before the First State Conference on Taxation of the State of New York above referred to, made the fol- lowing statement concerning such section: "The assessment of capital stock is in such chaotic condi- tion that it is, I think, a fair statement that no one could pos- sibly explain the administration of the law as to-day actually in force, by a mere study of the face thereof. It has been con- strued in a manner which from a mere perusal of the statute seems little less than fanciful. The decisions are by no means uniform and the status of a o^iven corporation thereunder to-d^ay is one of the most technical and difficult questions an attorney specializing in taxation is called upon to answer. The latest result of the constantly added amendments has been the recent decisions of the Court of Appeals in the case of non-dividend paying corporations, reducino^ the Slate's revenue from those sources by many hundred's of thousands of dollars annually, although it is thought by those who were instrumental in draw- ing the portion of the law construed that such construction is wholly at variance with the intention of the Legislature which passed the amendment." The Courts have also severely criticised the method of taxing corporations under the present Section 182 of the tax law. Judge Cullen in the case of People ex rel., etc., Co. v. Roberts, 168 N. Y. 14, in construing said section said in the opinion: "We are quite aware that despite our construction of the statute there will still remain in it some inconsistencies and ap- parent unfairness in particular cases. The remedy in those cases must be an appeal to the legislature for modification of the law." Judge Haight in the case of People ex rel. New York Central v. Knight, 173 N. Y. 255, in writing an opinion under such section and concluding that Section 182 must be read with the present Section 193 of the tax law, said: "The two sections are apparently conflicting. In such cases it is the duty of courts to reconcile contradictory or conflicting provisions when possible, and the case cited is a precise authority for the principle that the tax should be based upon the actual value. This permits the statute to operate in a way tiiat is reasonable and! just, while the other view would render it even more confusing than it now is. Courts cannot always follow logical reasons when dealing with a complicated statue con- structed without much method or system in the arrangement of 12 its different parts and lacking in clearness and precision of language." Judge Werner in the case of People, etc., v. Williams, 198 N. Y. 238, in construing Section 182 said in the opinion: "But even if we concede that this difference in the phrasing of the two subdivisions of the same section is indicative of an intent to tax non-dividend paying corporations with impaired capital upon the basis of the par value of their capital stock, we cannot escape the conviction that a very simple idea which might have been framed in very plain language has been ob- scured in a mass of verbiage much better calculated to conceal than to reveal the true intent" The same Judge in a later case entitled People ex rel., etc., v. Gaus, 198 N. Y. 250, made the following statement concerning such section : "The addition of a few words would have made the mean- ing of this part of the statute so clear as to preclude mistake or misunderstanding. As it stands, it is doubtful and equivocal. It was the necessary confusion that resulted in construing the system of taxation under the present Section 182 of the tax law that evidently caused Judge Learned in an early case (People v. Delaware & Hudson Canal Company, 54 Hun. 598) to lose all faith in legislators, for in construing the law at that time Judge Learned said : "Any one who knows how statutes are passed mns t be aware that the intent of the legislature would be extronely difficult to ascertain ; if indeed, in the^ minds of many of the legislators any such thing existed at all." The method of taxing corporations under the present Section 182 of the tax law was originally contained in Chapter 542 of the laws of 1880. The law has been repeatedly amended since that time, more especially by the laws of 1882, 1889, 1890, 1896, 1901, 1906, 1907, 191O, and a most drastic amendment was offered at the last session of the legislature, which was not adopted. If any reliance can be placed upon the opinions expressed by experts and by judges in reference to the scheme of taxation provided for under Section 182, and if numerous amendments are any criterion whatever, it would seem that it would be difficult to imagine a more complicated, confusing and' unscientific method of taxation than that provided for under Section 182 of our present tax law. 13 It cannot be said that even now the law is settled as to the intent and meaning of Section 182, notwithstanding^ the numerous amend- ments to that section and the multitudinous number of decisions there- under by the courts of the State. As late as September, 1916, the Appellate Division of the Third Department handed down a decision in the case of People ex rel. Rid^ewood Land and Improvement Com- pany V. State Tax Commission, holding that : "Where a stock corpo- ration, organized under the Act of 1848 and amendments thereto, for the purpose of 'purchasing, taking, holding and possessing real estate and buildings, and selling, leasing and improving the same/ has dis- posed of all its real estate and buildings, receiving payment therefor partly in cash and partly in purchase-money mortgages, has distributed among its stockholders the cash so received and is engaged in collect- ing and so distributing the sums due on said mortgages, it is not subject to tax under Section 182 of the Tax Law for the privilege of doing business or exercising its corporate franchises in this State. "Sums so distributed to the stockholders, even though they consist in part of interest on purchase-money mortgages or balances thereof, do not constitute 'dividends' within the meaning of Section 182 of the Tax Law. "The capital of the corporation is not 'employed within this State,' nor is it 'doing business or exercising its corporate frairchises' therein, by the mere holding of a purchase-money mortgage and the dis- tribution among stockholders of the principal and interest thereof as collected." We quote from the opinion in that case as follows : "Upon the broader question of whether the caintal of the relator was employed in this State, we are not persoaded that the mere holding of a purchase-money mortgage and the dis- tribution of the principal and interest as it is collected, consti- tutes domg the business for which the relator was incorporated. It has authority under its franchise to be a corporation to 'ac- quire by grant, gift, purchase, devise or bequest; to hold and dispose of such property as the purposes of the corporation shall require, subject to such limitations as may be prescribed by law' (General Corporation Law, sec. ii), and this power would seem to be sufficient to warrant the corporation in holding a purchase-money mortgage during the time that it was neces- sary to collect the principal and interest, without being held to be exercising its franchise to do the things which were specially permitted to it under its charter. At least we are unable to see any clear distinction between the case at bar and that of Lehigh 14 & N. Y. R.R. V. Sohmer (217 N. Y. 443), so far as this partic- ular point is concerned, and we are disposed to leave the distinc- tionfi, if one is to be made, to the Court of Appeals.'' It therefore seems that although this law was first enacted in 1880, and has been amended many times since, to meet the many difficulties arising thereunder, wc now find our Appellate Division calling upon the highest court in the State to pass upon a certain phase of this Act, for the reason that the Appellate Division does not feel fully competent to make the decision. Under Section 183 of the tax law manufacturing corporations and certain other corporations therein mentioned are exempt from the payment of the franchise tax provided for under Section 182, pro- vided the corporations named in Section 183 invest at least 40% of their capital in their regular business in the State of New York. It would appear that manufacturing corporations, which undoubtedly constitute the most important class under Section 183, were promised exemption from this franchise taxation, if they would invest 40% of their capital in manufacturing in the State. At the last session of the legislature a bill was introduced having for its object the repeal of Section 183, so as to subject manufacturing corporations to taxation under the confusing system covered by Sec- tion 182. Manufacturing corporations very generally, objected to this measure upon the ground that it would amount to a repudiation of a contract between them and the State of New York, which contract guaranteed to such corporations an exemption under Section 182 if they made a permanent investment of 40% of their capital in the State, and inasmuch as certain manufacturing corporations had relied in good faith upon such exemption and had fully performed their part of the contract by makii^ a permanent investment of 40% of their capital in the State, to now remove such exemption, they con- tended, would constitute an act of bad faith upon the part of the State. Whether or not this argument were sound it would seem to be a fact that any corporation would be justified in opposing any act that would bring it under so confusing, complex and unscientific a method of taxation as that contained in Section 182. We have endeavored in the foregoing to briefly sununarize the tax situation in the State of New York concerning business corporations under the law and its administration by the tax officials. Let us now take some concrete examples and ascertain if we can the probable results in case the present tax law could be reasonably enforced and was enforced by the tax officials. As the discrimination under the enforcement of the present tax law would appear to be more glaring against domestic manufacturing corporations than other business cor- porations, we will consider a domestic manufacturing corporation in the following illustration: Let us consider a tax district containing only the following tax- payers, to wit: (1) A domestic manufacturing corporation. (2) A foreign manufacturing corporation. (3) A copartnership engaged in manufacturing, and (4) An individual engaged in manufacturing. Let us assume that each taxpayer has the same amount and kind of property, is engaged in the same kind of business, and that there are no other taxpayers in the district. The reasonable value of all of the property of each of the above mentioned taxpayers, let us say, is as follows: Description Value Real estate and fixed machinery $160,000 Machinery and tools not part of realty 20,000 Goods, wares and merchandise 160,000 Notes and accounts receivable 60,000 Corporate securities (bonds) ^ 100,000 Cash 100,000 Total property $600,000 Stock issued by corporation, say ? $600,000 Now, as each taxpayer is located in the same district, has the same amount and kind of property, and uses it for the same purpose, it is obvious that each ought to have identically the same assessment and bear identically the same tax burden, but watch what happens: A. We will first take the domestic manufacturing corporation having the above described property taxable under Section 12 of the tax law. This corporation, say, has made report either prior to its assessment or subsequent to it as a result of excessive assessment. The result is as follows: Total property shown by report ^ $600,000 Less assessed value of real estate, say 96,000 Total personal property assessment $504,000 Real estate assessment . 96^000 Total assessment $6oo/xx) 16 Note : In this example we have assumed that the real estate is assessed at 60% of value. This, we believe, is about the average rate. In any event, we are using the same rate of actual value in all examples shown herein, so the rate is not so important. Of course, the fact that the real estate is assessed at less than actual value, is of no beneht to the domestic corporation because the difference between the actual value and assessed value, if any, is added to the personal assessment under Section 12 of the tax law. B. Next take the foreign manufacturing corporation, taxable under Section 7 of the tax law, no report being required of a foreign corporation. Real estate and machinery, assessed same as domestic manufacturing corporation $96,000 Machinery and tools, without report probably not more than 50% $10,000 Goods, wares and merchandise, without report probably not more than 50% 80,000 Notes and! accounts receivable, without report probably not assessed Corporate securities (bonds) not assessed — Cash, without report probably not assessed-. Total personal property assessment $90,000 Total real estate assessment 96,000 Total assessment $186,000 Note: As the foreign corporation makes no report, it is prob- able that it could successfully contend that its notes, accounts, cash and other intangibles were located outside the State where its principal office was located. C. Next take the co-partnership engaged in manufacturing, tax- able under the general provisions of the tax law, no report being required. Real estate, assessed same as domestic manu- facturing corporation $96,000 Machinery and tools, probably not more than 50% $10,000 Goods, wares and merchandise, probably not more than 50% 80,000 Notes, accounts, etc., probably 17 Corporate securities, probably Cash, probably Total personal property assessment $90,000 Total real estate assessment 96,000 Total assessment : $186,000 D. The assessment of the same property in the hands of an individual engaged in manufacturing would probably be the same as the assessment against the co-partnership, viz. : Total personal property assessment . $90,000 Total real estate assessment 96,000 Total assessment $186,000 We realize that these assessments would vary in different locali- ties, but we believe that the result of the investigation by the Joint Legislative Committee on Taxation of the State of New York, of which our friend Senator Mills was Chairman, established that in- tangible personal property such as bonds, cash in bank, notes and ac- counts receivable, and any property which the assessor could not see, escaped taxation generally in this State in the hands of individuals and co-partnerships. The passage of the secured debts law tends to sub- stantiate this view. In r^rd to tangible personal property such as live stock, machinery and merchandise, we think, as a rule 50% of the actual value would fairly represent the actual assessment upon the part of the local assessor. This was the experience in Massachu- setts where the individual was required to file a report with the local assessor, in default of which he was doomed to the assessment made by the assessor. Therefore, if Massachusetts, where a report is re- quired from individuals, does not assess tangible property at more than 50% of actual value on the average, it would seem that New York, where no report is required, would not assess such property at a greater percentage of actual value. It therefore seems that the assessment of the four taxpayers above mentioned, all having the same property, would be represented as follows : Total Assessment A. The Domestic Corporation $600,000 B. The Foreign Corporation 186,000 18 C. The Co-partnership — . 186,000 D. The Individual 186,000 Total assessment in district $1,158,000 Let us assume that the rate of tax was 3%. Then the taxes paid would be as follows : A. The Domestic Corporation $l8,O00 B. The Foreign Corporation (less than as much) 5»58o C. The Co-partnership (less than as much) 5,580 D. The Individual (less than Y^ as much) 5,580 Total tax raised - $34,740 In other words, while the domestic corporation owns but 25% of the property in the district, it pays over 51% of the amount of tax. In other words, the tax against the domestic manufacturing corporation is more than three times that of any other taxpayer in the district having the same amount of taxable property. This, we think, is the necessary result of an assessment under Section 12 of the tax law in case such section is rigidly enforced. You will recall that the present State Tax Commission in the forepart of the letter of instructions referred to herein, advocated the treating of all property alike in the matter of assessment, yet, upon a careful analysis of the situation it seems that the result is necessarily a discrimination against corporations that are assessed under Section 12 of the tax law, unless they have debts to offset the assessment. Of course, if the taxpayers consideret exceeding 10% of ^e issued capital stock. If the bill advocated at the last session subjecting manufacturing corporations to a franchise tax in addition to their other taxes, had 19 been passed, the discrimination against manufacturing corporations as compared with individuals, would have been even greater than it now is. Let us see what additional franchise taxes the domestic corpo- raticm would have had to pay if this franchise tax bill had been passed. The capital stock of this corporation was $600,000 Its net earnings were, let us say $7S»00^ It could declare a dividend of 10%, amounting to 60,000 And carry to surplus $15,000 The rate of tax would be J4 mills for every 1% of dividend, or 10 times }i mills, which is $.0025 the tax rate. $600,000 times $.0025 is $1,500, the franchise tax. The total property tax was $18,000 The frandiise tax would be 1,500 Total tax of domestic company $l9»5O0 Of course the individual pays no franchise tax, his tax would still be 5»58o This would make the total tax of the domestic corpo- ration $i3»92o greater than that of the individual having the same amount of taxable property and transacting the same business in competition with the corporation. To put the proposition another way, the corporation would have to earn $13,920, or over 2.3% more on its investment than the individual would have to earn on tiie same investment, to enable the corporation to compete with the individual in the sale of its products, all due to this discrimination in taxation. Of course, the co-partnership would be in just as favorable a position as the individual, because the co-partnership would be taxed precisely the same as the individual. The foreign corporation would be favored in connection with its taxation upon property, as we have seen, but would be subject to the franchise tax in proportion to the amount of property invested in the State. Another difficulty is that other States have much more favorable tax laws for corporations than the laws of this State. For example, let us consider a foreign corporation with the same kind and amount of 20 property as the domestic manufacturing corporation herein mentioned, the foreign company being organized in Pennsylvania and having its property located in that State. In Pennsylvania manufacturing corporations pay no personal prop- erty taxes nor franchise taxes whatever. The real estate is not tax- able at all in that State for State purposes. Therefore, the only taxes payable by a Pennsylvania manufacturing corporation are local taxes assessed upon the real estate. Let us therefore consider the taxes that would probably be paid by a Pennsylvania manufacturing corporation having the same prop- erty in Pennsylvania as the New York manufacturing corporation herein considered. Description of Prop. Reasonable Value. Amt. of Tax Machinery and' tools $20,000 Goods, wares and merchandise. 160,000 Notes and accounts receivable 60,000 Corporate securities (bonds) 100,000 Cash 100,000 Real estate 160,000 (probably) $2,560 In figuring the amount of local taxes payable upon the real estate, we have assumed that the real estate would be assessed at 80% of its value and that the tax rate wouki be 2%. The rate of assessment and the rate of tax would undoubtedly vary in different localities, but we believe, based upon our experience, that the foregoing rates would fairly represent the average in Pennsylvania. The Pennsylvania corporation would therefore pay an annual tax of about $2,500, whereas the New York corporation, with identically the same kind and amount of property, if assessed under Section 12 of the tax law and subjected to the franchise tax under Section 182, would pay an annual tax of about $19,500. In other words, the tax paid by the Pennsylvania corporation ($2,500.00) in Pennsylvania, would represent only about .4 of 1% of its total invest- ment of $600,000, whereas the tax paid by the New York corporation ($19,500.00) in New York would represent about z%% of its total investment of $600,000. If we assume that the net earnings of these companies amount to $75,000 in each case, and they probably would not exceed that figure, then the Pennsylvania corporation would pay in taxes only about 3>^% of its net earnings, whereas the New York corporation under the proposed conditions would pay in taxes about 26% of its net earnings. 21 More than this, the Pennsylvania corporation could actually place its manufacturing products in direct competition with those of the New York manufacturing corporatioii. Under the decisions of our courts the Pennsylvania corporation could do the following things in this State without being amenable to our tax laws and therefore paying no taxes in the State of New York : (a) It could transmit to its agent here its manufactured product for sale, provided the proceeds were transmitted forthwith to the h