tion is merely the measure of the tax, the character of the property in which the capital is invested and the location of such property are immaterial,15 but when the tax is a property tax such deduction must be made.16 Like patents and copyrights, when United States bonds form a part of the capital stock they are excluded from the computation whenever the tax is a property tax.17 But if the tax is a franchise tax then the fact that the capital stock which measures it is partly or wholly representative of investments in government securities. is altogether immaterial.18 143. What Constitutes Capital Stock for Purposes of Taxation.— There is a considerable diversity of opinion as to what constitutes the "capital stock" of a corporation for purposes of taxation.19 In some jurisdictions it is considered that the capital stock of a corporation is all its property, tangible and intangible. In such jurisdictions it is held that the kind of property denominated "capital stock" is not shares of stock either separately or in the aggregate. The term designates the property of the corporation subject to taxation as a homogeneous unit partaking of the nature of personalty and subject to the burdens imposed upon it at the domicil of the owner. Where this view is taken "capital" and "capital stock" are practically synonymous terms,20 and in such jurisdictions the assessors have no right to take the aggregate value of the shares of stock into which the capital of a corporation is divided as the value of its capital stock when they have other means for ascertaining the value of the capital stock. In other jurisdictions it has been held that the capital stock is the money paid in, or authorized or required to be paid in, as the basis of the business of the corporation and the means of conducting its operations. It represents whatever it may be invested in. It is a trust fund held by the corporation as trustee. It is subject to taxation like other property.* In some of the foregoing states where a statute provides for the taxation of the capital stock of a corporation in the same manner as other 15. Home Ins. Co. v. New York, 119 U. S. 129, 8 S. Ct. 1385, 30 U. S. (L. ed.) 350, 134 U. S. 594, 10 S. Ct. 593, 33 U. S. (L. ed.) 1025. 16. Note: 58 L.R.A. 565. 17. New York v. Tax, etc., Com'rs, 2 Black 620, 17 U. S. (L. ed.) 451; Bank Tax Case, 2 Wall. 200, 17 U. S. (L. ed.) 793. Note: 58 L.R.A. 568. 18. Home Ins. Co. v. New York, 119 U. S. 129, 8 S. Ct. 1385, 30 U. S. (L. ed.) 350; 134 U. S. 594, 10 S. Ct. 593, 33 U. S. (L. ed.) 1025. Note: 58 L.R.A. 568. 19. Holly Springs Sav., etc., Co. v. Marshall County, 52 Miss. 281, 24 Am. 20. People v. Coleman, 126 N. Y. 433, 27 N. E. 818, 12 L.R.A. 762 and note; People v. Morgan, 178 N. Y 433, 70 N. E. 967, 67 L.R.A. 960; Foster v. Stevens, 63 Vt. 175, 22 Atl. 78, 13 L.R.A. 166 and note. Note: 58 L.R.A. 516. See also CORPORATIONS, vol. 7, pp. 195-196. 1. People v. Coleman, 126 N. Y. 433, 27 N. E. 818, 12 L.R.A. 762. 2. Farrington v. Tennessee, 95 U. S. 679, 24 U. S. (L. ed.) 558. property, the capital stock taxable under such a statute is its capital existing in money, or property, or both. It does not embrace dividend earning power, or good will, which are elements in the value of shares of stock in the corporation. In other jurisdictions, however, a tax on the capital stock of a corporation includes all the assets of the corporation, tangible and intangible, and if it appears that the value of its capital stock is in excess of the value of all its tangible property, it is taxable on such excess. Under statutes making the aggregate value of the shares the basis of the capital stock tax, only those shares that have been actually issued, or are at least ready for immediate delivery to subscribers, are counted. Proposed unissued new shares not deliverable before a fixed time in the future, even when subscribed and partly paid for, cannot be included. Stock once issued and remaining outstanding is taxable as capital stock until retired and canceled in accordance with law, although it is owned by the corporation which issued it and is held as so called "treasury stock." 144. Elements to Be Included in Valuing Capital Stock.-Surplus, reserve funds, accumulations, undivided profits and the like do not constitute any part of the capital stock of a corporation, although in states in which the capital of a corporation is considered the equivalent of the value of the shares of stock in the aggregate, each of these items is resorted to by assessors, if not as a measuring standard, at least as a guide in assessing capital stock. Whenever the capital stock of a corporation is treated for the purposes of taxation as the aggregate shares of stock the good will of the corporation is undoubtedly an element of value, though it was formerly considered that when the capital stock was merely the aggregate money and property of the corporation good will could not be considered. When a corporation is taxed upon its capital employed within the state, stocks in foreign corporations owned by it are to be excluded,10 but the rule is otherwise as to stocks in domestic corporations which are considered as representing capital stock employed within the state without regard to the location of the actual activities of such corporations.11 3. People v. Coleman, 126, N. Y. 433, 27 N. E. 818, 12 L.R.A. 762. 4. Hyland v. Central Iron, etc., Co., 129 Ind. 68, 28 N. E. 308, 13 L.R.A. 515; Henderson Bridge Co. v. Com., 99 Ky. 623, 31 S. W. 486, 29 L.R.A. 73, affirmed 166 U. S. 150, 17 S. Ct. 532, 41 U. S. (L. ed.) 953. 5. Note: 58 L.R.A. 574. 6. Knickerbocker Importation Co. v. State Board of Assessors, 74 N. J. L. 583, 65 Atl. 913, 9 L.R.A. (N.S.) 885 and note. 7. Utica Bank v. Utica, 4 Paige (N. Y.) 399, 27 Am. Dec. 72. Note: 58 L.R.A. 569. 9. Adams Exp. Co. v. Ohio State Auditor, 165 U. S. 194, 17 S. Ct. 305, 41 U. S. (L. ed.) 683; People v. Roberts, 159 N. Y. 70, 53 N. E. 685, 45 L.R.A. 126. Note: 58 L.R.A. 567. 10. People v. Campbell, 138 N. Y. 543, 34 N. E. 370, 20 L.R.A. 453. 11. Note: 58 L.R.A. 568. 145. Determination of Value of Capital Stock.-The actual market value of the capital stock of a corporation is determined by factors differing essentially in kind from those which fix the actual value of the property and assets which the capital stock of the corporation represents.12 It is error to value for purposes of taxation the capital stock of a corporation upon the single basis of the value of the property of the corporation. The taxing authorities are bound to consider all other pertinent facts affecting the value of the capital stock, such as indebtedness, net earnings, ability or inability to pay dividends and the like.13 The assessors may if they see fit fix the value of the aggregate capital stock of a corporation by capitalizing the average net income of the corporation for a series of years at the rate prevalent as a return upon investments of a similar character.14 If the valuation fixed upon is the real and actual market value it will be sustained,. although it was speculative and greatly exceeded the value of all the property owned by the corporation. 15 One corporation cannot complain that its capital stock is valued as high as that of another corporation, the property of which is more valuable, when it is not shown. that its earning power is less, 16 Even when the capital stock of a corporation is considered to be the net amount of its tangible capital assets, it is not improper for the assessors to consider the market value of shares of its stock, whenever the actual value of the capital is not shown in some more satisfactory manner. The fair cash value of the shares of capital stock in a corporation for the purpose of taxation is their market price at the time they are assessed, not what they are likely to realize the stockholders in case of liquidation.18 In states in which the value of shares of stock taken for the purpose of determining the value of the capital is the average selling price during the year, the rule for ascertaining such average selling price is to multiply the number of shares in each sale by the price paid in each transaction, and divide the total aggregate of all the sales by the entire number of shares sold during the year. It will not do to take the highest and lowest price paid per share during the year and fix the mean between them.19 146. Indebtedness as Capital.-The indebtedness of a corporation is frequently an element in fixing the value of its capital stock, although it is of course a palpable absurdity to tax a debtor upon the amount of his indebtedness as if it were property, and in theory this is never done. But the value of the shares of a corporation generally 12. Hamilton Mfg. Co. v. Massachusetts, 6 Wall. 632, 18 U. S. (L. ed.) 904. 13. Note: 58 L.R.A. 595-599. 14. Louisville, etc., R. Co. v. Greene, 244 U. S. 522, 37 S. Ct. 683, 61 U. S. (L. ed.) 1291, Ann. Cas. 1917E 97. 15. Note: 58 L.R.A. 612. 16. Note: 58 L.R.A. 595. 17. People v. Coleman, 126 N. Y. 433, 27 N. E. 818, 12 L.R.A. 762. 18. Note: 58 L.R.A. 574. 19. Note: 58 L.R.A. 577. indicate the value of the capital stock minus the debts of the corporation, and as it is not customary to allow an individual to deduct his indebtedness from his property for purposes of taxation, no different rule is applied to a corporation. The value of its capital stock therefore is the aggregate value of the shares, plus the indebtedness of the corporation.20 Logically this principle applies with equal force to both floating and funded debts, but the theory is seldom carried to its logical end. In general the funded debt is added to the aggregate value of the shares of stock and the sum of the two taken to be the value of the capital stock. The floating debt is usually tacitly or expressly ignored.1 The indebtedness of a corporation may be considered in one other aspect in relation to its capital stock. When the capital is limited to tangible property, the amount of bonded indebtedness with which capital assets were constructed or bought is some measure of the value of such assets. This is not taxing indebtedness, but property which its owner ran into debt to get.2 147. Income as Measure of Value of Capital.-In some states the value of the capital stock of a railroad is determined by capitalizing its net earnings at the current rate of interest, not necessarily as the sole factor in every case, but generally as the chief one. So also dividends made or declared by corporations have frequently been resorted to for the purpose of valuing capital stock as a basis for taxation, but dividends in liquidation or in distribution of capital cannot be considered in determining the value of the capital stock of a corporation. When a foreign corporation is subjected by a state to an excise for the privilege of doing business within such state, graded in proportion to its dividends, it makes no difference whether the dividends are earned within or without the state." 148. Deductions from Total Value of Capital Stock.-While it may be competent for a state to tax a domestic corporation upon its entire capital stock even though the property in which its capital is invested is itself taxed, or is located outside the state or is otherwise beyond the taxing power of the state, it is usual in imposing a capital stock tax for the state to provide for deductions on account of those elements which should not in justice be included. The value of real cstate situated in another state, or of tangible personal property having its situs in another state, should, however, undoubtedly be deducted from the value of the capital stock, since such property is beyond the 20. State Board of Equalization v. People, 191 Ill. 528, 61 Ñ. E. 339, 58 L.R.A. 513 and note. 1. Note: 58 L.R.A. 577. 2. Henderson Bridge Co. v. Com., 99 Ky. 623, 31 S. W. 486, 29 L.R.A. 73, affirmed 166 U. S. 150, 17 S. Ct. 532, 41 U. S. (L. ed.) 953. 3. State v. Virginia, etc., R. Co., 23 Nev. 283, 46 Pac. 723, 35 L.R.A. 759. 4. Note: 58 L.R.A. 572. 5. People v. Roberts, 155 N. Y. 408, 50 N. E. 53, 41 L.R.A. 228. 6. Note: 58 L.R.A. 600. taxing power of the state. The corporate franchise, considered separately, is not property subject to taxation in states other than that which granted it, and a corporation doing business outside the state of its origin is not entitled to a deduction for a proportionate part of the value of its franchise. It is quite generally provided by statutes taxing the capital stock of corporations, that the real estate owned by the corporation within the state shall be taxed in the taxing district where situated in like manner as other real estate is taxed, and that a deduction of the amount invested in such real estate should be made in assessing the value of the capital stock. Under such a statute it has been held that the deduction should be based upon the assessed and not the actual value of the real estate, since if these were not identical, there would either be double taxation or else part of the capital of the corporation would escape taxation altogether.10 Real estate mortgages owned by a corporation should be deducted under such a statute, notwithstanding that the mortgagors had covenanted to pay all taxes.11 It is quite generally held that, in assessing the value of capital stock for purposes of taxation, a deduction should be made of the amount invested in national securities and other property owned by the corporation that is exempt from taxation.12 On the other hand it has been held that the value of stock in other corporations cannot be deducted in fixing the value of the capital of a corporation for taxation, where the statute provides only for the deduction of the assessed value of real and personal property upon which it pays taxes, although another statute provides that corporations legally holding stock in other corporations upon which a tax has been paid by the corporation issuing it shall not be required to pay any tax on such stock or list the same.13 When the statutes, in order to avoid double taxation, provide that so much of the capital stock of a corporation as is invested in property which is otherwise taxable shall be exempt, it is not entitled to an exemption with respect to property which is otherwise taxable but which it has no power to purchase or hold.14 A deduction on account of the indebtedness of the corporation is quite generally authorized.15 Unclaimed dividends constitute a liability which should be deducted,16 7. Delaware, etc., R. Co. v. Pennsylvania, 198 U. S. 341, 25 S. Ct. 669, 49 U. S. (L. ed.) 1077. Notes: 58 L.R.A. 600; L.R.A.1915C 382. 8. American Glue Co. v. Com., 195 Mass. 528, 81 N. E. 302, 122 A. S. R. 268. 9. Note: L.R.A.1915C 383. 10. Smith v. Stephens, 173 Ind. 564, 91 N. E. 167, 30 L.R.A. (N.S.) 704 and note. 11. Note: L.R.A.1915C 384. 12. Home Sav. Bank v. Des Moines 205 U. S. 503, 27 S. Ct. 571, 51 U. S. (L. ed.) 901. Note: 58 L.R.A. 564, 568. 13. State v. Morrison, 155 N. C. 53, 70 S. E. 1079, L.R.A.1915C 380 and note. 14. Commercial F. Ins. Co. v. Board of Revenue, 99 Ala. 1, 14 So. 490, 42 A. S. R. 17. 15. Notes: 58 L.R.A. 599; L.R.A. 1915C 380. 16. Note: L.R.A.1915C 381. |