Callery's Appeal

Opinion by

Mr. Justice Kephart,

This is an appeal from the Common Pleas of Allegheny County, striking off a personal property tax levy. It was stated at argument that the lower court’s action affects tax revenues amounting to $1,250,000 heretofore received by the county, and ultimately determines the county’s right to impose this tax on property valued at half a billion dollars. We mention this to indicate the far-reaching effect of the conclusion we may make in the present case.

To justify the imposition of a tax without a statute plainly warranting it, it is not enough to show that the absence of a tax works an injustice in permitting many persons to escape. The taxing power lies with the legislature, and a survey of our taxing enactments evidences a policy to tax residents on their investments in corporations, either personally or through the corporation. Many exemptions exist, some based on a supposed greater benefit to the State; but, through all their various forms, the predominating policy runs to cause the citizen so investing capital to bear a fair share of the cost of maintaining the government, and he who seeks to be excused must bring himself within the class of exempt persons.

It is impossible to always attain absolute equality within the same class of taxable subjects, but, having in view the state’s paramount purpose, with the legislative will before them, courts must not, by astute efforts, block the intendments of the Commonwealth and frustrate a policy that has for its foundation peace and good will among our citizens, based on equality. On the other hand, courts should not be assiduous to burden those who, through energy, thrift, ability and resourcefulness, have acquired an abundance of the subjects of taxation, simply because they are in this fortunate position.

The present appeal is not an endeavor to evade taxation, but one which earnestly and fairly raises questions affecting our taxing laws and the true meaning of their various interpretations heretofore made by this court. If other residents, in the same position, with appellee’s view as to the law, have not been taxed, still more then this appellee, and others in like position who in the past have paid the tax now disputed, should not be required to continue such payments if the assessment is not authorized by law.

The County of Allegheny has for some time assessed and collected what is commonly called a personal property tax, under the Act of June 17, 1913, P. L. 507, against resident holders of shares of stock of foreign corporations, and for the year in question assessed against appellee a tax of four mills on $400,000, the value of 2,444 shares of stock of the Gulf Oil Corporation.

Appellee, a taxpayer, took an appeal from the board of revision, which the court below sustained, relieving Mm from payment of the tax in question, for the reason that the Gulf Oil Corporation, itself, was liable to a tax, and, even if it was not, the action of the auditor general determining that it was so liable was conclusive on the court. The county takes this appeal.

The Grulf Refining Company is a Texas corporation, hereinafter termed “subsidiary,” incorporated for the purpose of the production and manufacture of petroleum. It does business in the United States, Mexico and elsewhere. Later, the Gulf Oil Corporation, hereinafter termed “holding company,” was formed. It was incorporated under the laws of New Jersey for the purpose of “holding the stocks of subsidiary companies engaged in the business of producing, transporting, manufacturing and marketing petroleum and petroleum products.” Holding company acquired all the stock of subsidiary and was recently registered in Pennsylvania; it filed a consolidated report in the office of the auditor general and paid a capital stock tax of $11,774.10 on approximately $2,250,000, and a loan tax for the year 1920. Both these taxes had been heretofore paid by subsidiary. Holding company has an authorized stock issue of $60,-000,000, of which $36,000,000 is outstanding, the whole issue valued in round numbers at $59,900,000.

All tangible property, real and personal, is owned by the subsidiary in its own name; it is a going concern, functioning through its own charter powers. The holding company does not own any tangible property in Pennsylvania, and from its report we find its intangible assets amount approximately to $113,000,000, made up of stock of foreign corporations, United States securities, bonds, advances to corporations, cash in bank, notes and accounts receivable and other miscellaneous assets. Board meetings are held, money deposited, dividends and interest paid, and all its officers reside here, the company occupying several floors of an office building in Pittsburgh.

A personal property tax is a personal levy against resident holders, computed on the value of shares of stock owned by them, not taxable for state purposes or exempt under state laws; and, in this ease, the shares are taxable unless the corporation issuing them is liable for a capital stock tax or is relieved from payment by state laws.

Corporate tax is a levy by the State against the capital stock, as its value is computed from the assets, less such as are nontaxable, exempt or on which a state tax has been paid. Corporations are liable for such tax under the Act of June 8, 1891, P. L. 228, 235, section 4, as amended by the Act of June 8, 1893, P. L. 353, 354, section 1, and by the Act of July 15,1919, P. L. 948, section 1. A tax of five mills may be levied on the value of the capital stock on all corporations, domestic and foreign, doing business, and liable to taxation, or having capital employed, or used, in this Commonwealth in any manner whatsoever.

The holding company is not incorporated as an operating company for producing, distributing, manufacturing and marketing of petroleum products, but is empowered to hold the stock of such companies, and if, in the light of some decisions of this court, we accept as conclusive the charter powers as being the only source or basis upon which a tax may be founded, we might dismiss this immediate subject by holding the Gulf Oil had no authority to function either in an executive or operating capacity as a manufacturer or vendor of petroleum products. But, apart from this, and conceding for the moment its right to actively engage in manufacturing petroleum products, was it, through its executive officers, doing a business that made it liable to a tax, or did it have property employed or used in the Commonwealth? Property employed or used refers, generally, to leasing or some such method of use: Com. v. National Cash Register Co., 271 Pa. 406.

It is contended holding company managed, supervised and controlled the various activities of subsidiary; that, as it was the executive directing energy, through its many instrumentalities, it carried on the work of the refining company; and, on the theory that the law regards the substance and not the form, through holding company’s sole ownership of all subsidiary’s stock, such ownership drew to it the physical property of subsidiary; and that, with the screen of corporate existence thrust aside, the holding company was in fact the owner of subsidiary’s property, doing business and liable for a tax within the meaning of our tax statutes.

Let us examine the question a little more closely. Holding company is a distinct, corporate entity, as is also subsidiary. The latter has power to manufacture and sell, with all the incidental rights necessary to the prosecution of the business. Holding company, as its sole stockholder, controls subsidiary; but, to do so, it must use the rights and powers of the latter. Holding company has no authority to sell oil; but, through its officers, acting as officers of the refining company, or compelling the latter’s officers to obey, it imposes its will on subsidiary. Holding company does this, however, only as sole shareholder; it could impose no liability or legal obligation on the subsidiary except as the individuals who acted were brought somewhere within the limits of the latter’s functioning body. The directors of the two companies may be identical, but this would not alter the situation.

The Gulf Refining Company, the subsidiary, is the living, operating business organization, with charter powers to so act. It is this company that comes in touch with the great commercial world, from Mexico to Canada; it handles the mammoth production which gives substance to the enterprise. It is this company that directly bears the result of all acts, good or bad, in relation to or connected with the business of producing and transporting, manufacturing and marketing petroleum and petroleum products. The sole shareholder can lawfully impose its will on Gulf Refining and enforce obedience through the latter’s machinery, created by law to govern it. Gulf Oil, eo nomine, could not replevin a wheelbarrow of Refining Company, nor could it, eo nomine, execute a mortgage on the latter’s property. Holding company’s control does not sweep aside the corporate existence of Refining Company; the corporations are just as separate and distinct as though the sole shareholder did not exist. Gulf Oil, as sole shareholder, receives all net profits of the subsidiary company through dividends or other arrangements. Their dealing, because of share ownership, may assume various closely related forms; and, as no outstanding holder is prejudiced through such acts, there is no one to complain. The corporate lines are distinct, and we see no reason why it is not only legally right but wise to keep them so; for, while it may avail the owners of stock, in the present instance, to wipe them out, later, and, in matters of more serious import, when their interests may dictate a different attitude, it might prove disastrous to them in the extreme. A corporation does not lose its corporate identity when its stock is all owned by another corporation: Bridge Co. v. Traction Co., 196 Pa. 25, 28.

But it is urged the Westinghouse Case (251 Pa. 12) controls. There we decided that, where a domestic company was actually engaged in manufacturing business within the State, and, in order to conduct advantageously certain minor enterprises, ancillary to its main business, the property of which enterprises it already owned, it incorporated companies outside the State (which assumed control of the business in question for the domestic corporation), we would consider, for taxing purposes, the property of these foreign companies as belonging to the domestic concern; and, as thus situated, we held such property could not be taxed. There the outside enterprises were but a small part of a large body; but here we have a subsidiary company operating under charter powers, greater than and different from the powers of the holding company, and in no way subordinate to it, — with the former exercising the powers the latter says, mistakenly, it has and exercises. Under such circumstances, the subsidiary does not cease to exist, nor are its powers and property joined with those of the holding company, even for convenient taxation; although this may be done by consolidation or merger. It is not our purpose to extend the Westinghouse decision beyond the letter of its terms. See Com. v. Shenango Furnace Co., 268 Pa. 283.

Does Dupuy v. Johns, 261 Pa. 40, control? There the Crucible Steel Company, a foreign corporation, invested capital in Pennsylvania, the largest part in manufacturing, the remainder not so engaged. We held that the corporation was liable for a capital stock tax, and its resident shareholders were wholly relieved of liability for personal property tax. Here the subsidiary, Gulf Refining, a foreign corporation, has part" of its capital engaged in Pennsylvania, part in manufacturing petroleum and the residue is not so engaged. It is liable for taxation on that part of its capital employed here and not engaged in manufacturing; and its resident shareholders are not liable for a personal property tax. Up to this point the cases are parallel; from this point the additional facts present a very different situation.

So far, the resident shareholder in each company deals directly with his corporation; but another corporation (holding company) appears, with a different set of shareholders, and these claim that, because their company owns all the shares of Gulf Refining, liable to taxation, they have the same right to be relieved from personal property tax as the shareholders of the subsidiary. To reach this position, however, their holdings must be viewed by our taxing statutes through two distinct corporations; whereas the separate rights of a shareholder must come through the corporation which issues to him his shares, and, if the source of the existence of such shares is not doing business and liable to taxation, then the shareholder’s right to immunity is never gained.

In ascertaining the liability of the holding company to capital stock tax, different principles of law are involved. We must, in viewing it, eliminate actual ownership of tangible property and engagement in business as a manufacturer; for it had none of the first and did not enter upon the second. Was the holding company’s stock otherwise taxable?

This company, an independent entity, with its domicile in New Jersey, used in Pennsylvania capital contributed by its shareholders in the purchase of stock of Gulf Refining, a Texas corporation; which stock it here holds on deposit in safety vaults. The use of capital by a foreign corporation in purchasing stock of a Pennsylvania corporation is not the subjection by the purchasing company of so much capital to doing business in Pennsylvania (Com. v. Standard Oil Co., 101 Pa. 119, 149; Com. v. Curtis Publishing Co., 237 Pa., 333, 337); this is likewise true if the purchase is here made of stock of a foreign corporation doing business in Pennsylvania. . In purchasing, the capital is transferred to the selling company; it is that company which uses or employs it in Pennsylvania or elsewhere as it sees fit: Construction Co. v. Winton, 208 Pa. 467, 472. The thing here purchased was not, and is not now, in Pennsylvania; and the same is true of shares bought from shareholders.

We may illustrate what might happen if the law' were to the contrary. Resident shareholders of a foreign corporation, not liable to state tax, must return and settle for a personal property tax. Suppose such company, with a large list of such holders, here liable to this tax, purchases ten shares in a domestic concern liable to a tax. After registration, would this purchase constitute the “employment of capital or doing business, and liable for taxation” contemplated by the act, so as to relieve resident shareholders? It does not need much discussion to demonstrate the gross frauds that could, and probably would, be practiced if the law answered in the affirmative the proposition just put; which, of course, it does not. If ten shares will not accomplish the result, will one-third, one-half or all? Such transactions do not constitute “doing business, and liable to taxation”; nor is property or capital employed or used therein within the meaning of the law.

To what extent do the benefits of the thing bought pass on to the shareholders of the purchasing corporation? The shareholders of the two companies do not stand in the same relation to subsidiary’s property or capital employed. Holding company, a, corporate entity, is a shareholder of subsidiary, standing in the same relation to that company as any individual owner of stock; but the legal relations between the two companies, qua companies, are entirely different, as must be the rights of their stockholders. The thing purchased is shares of stock. In both instances the rights of the separate shareholders in their respective companies are determined by the law of New Jersey (McCloskey v. Snowden, 212 Pa. 249, 254; Kinney v. Mexican Plantation Co., 233 Pa. 232, 233), where the company was created and where the intangible property of each is properly taxable: Com. v. Curtis Publishing Co., 237 Pa. 333, 335. A corporation owns its property; the stockholder has no right to it or any part of it, and its special benefit (tax free) does not pass to him, any more than would the right to make a patented article, which the company manufactured under a license. When distributed in dividends he is entitled to his share; holding company’s shareholders do not receive the dividend as shareholders of subsidiary, nor could they force a redistribution of the dividend so received; a personal property tax is not intended to reach the property of a corporation. There is no connection under the law between the different sets of stockholders; each must work out his rights through his own company, and the rights of one do not pass to the other, under circumstances as here related.

The assets (shares of stock) so purchased, are not, as such, liable to a state tax. They are incorporeal, intangible things connected with a foreign corporation, which are not within the taxing jurisdiction of the State, the ownership of such property being referred to the state of its domicile, — its situs is there (Com. v. Standard Oil Co., 101 Pa. 119, 146; Neiler & Warren v. Kelley, 69 Pa. 403, 407; Com. v. Curtis Publishing Co., supra; Com. v. Traction Co., 233 Pa. 79, 80, 82), though the foreign corporation may be employing capital in Pennsylvania subject to tax. What is here said applies to all intangible assets of Gulf Oil, the holding company.

If Gulf Oil were a domestic corporation, owning intangible assets located in another state, Pennsylvania would be the taxable domicile of such assets: Com. v. Semet-Solvay Co., 262 Pa. 234, 236. Or if both Gulf Oil and Gulf Refining were domestic corporations, under the state of facts here presented, it would, when settling the capital stock tax of the former, or holding company, be liable for the fractional or proportionate part of the value of its subsidiary’s shares, untaxed in Pennsylvania, as such fractional part adds value to the capital stock to be taxed. Though such intrinsic value of shares may be out of the state (Com. v. Shenango Furnace Co., supra), shares of a corporation, held by a domestic corporation, are not taxed under a personal property tax. The Act of 1913 does not make such ownership taxable (see Com. v. Lehigh Coal & Navigation Co., 162 Pa. 603, on earlier legislation), but the value of the stock thus held adds to the general value of the capital stock of the holding corporation, to be deducted as the whole or part pays a state tax; but, in personal property levies, the tax is computed on the value of the shares, qua shares, and the Act of 1913 does not contemplate a fractional division of such valne: Dupuy v. Johns, snpra.

A corporation becomes liable for a capital stock tax when its stock has valne through its assets to make it liable ; it is on that value the tax is computed: Dupuy v. Johns, 261 Pa. 40, 45; Com. v. McGlinn Distilling Co., 265 Pa. 346, 350. Value, for purposes of capital stock taxation, comes through property, and if the corporation in question is doing business here, with no property or capital located or used in the Commonwealth assessable for state purposes, its stock has no value upon which a capital stock tax may be based.

Registration in the nature of a license, or a right to do business, has no taxable value; nonregistration simply renders a foreign corporation’s acts unlawful, and registration, without more, does not cause the corporation to become liable for a state tax.

When we look for the value of Gulf Oil stock we find intangible assets, beyond our taxing jurisdiction. The best evidence of this is the company’s report, where all intangibles are treated as extraterritorial. If this is the home of Gulf Oil for some purposes, as urged, the report shows the officers do not regard it as such for taxation. While these facts do not influence our decision of the main question, they show how Gulf Oil regards its intangible assets.

As the business, relating to charter purposes, of the company “holding the stock of subsidiaries,” was conducted in Pittsburgh, where its board of directors met, this, it is urged, is doing business liable to taxation, though the holding company owned no property in the State.

Acts in conformity to, and in furtherance of, the sole business purposes of a going concern undoubtedly represent “doing business”; but such acts alone do not constitute “doing business in and liable to taxation,” the situation which our taxing statute requires, and through which appellee bases his contentions as to the nontaxability of Ms shares here in question. The act recognizes a distinction between doing business that requires registration to bring a company within reach of legal process or that will require filing a loan report, and doing business in and liable to taxation (capital stock tax). Herein the Hazelton-Wilkes-Barre Case (251 Pa. 6) is parallel; under its facts that company would not be liable for a capital stock tax. We held it was doing business within the State and liable, under the Act of 1885, to make a report of corporate loans. It is somewhat like Colonial Trust Co. v. Montello Brick Works, 172 Fed. 310, and Washington-Virginian Ry. v. Real Estate Trust Co., 238 U. S. 185, where the registration was required with no tangible property to tax. Attention is directed to the Act of 1919 on the subject of loan tax. The Gulf Oil is in like situation, doing business within the meaning of the loan report and registration act, while its capital stock is not liable to a state tax through lack of taxable value.

It follows that a mere holding company, chartered in another state solely for the purpose of “holding the stock of subsidiary companies,” as the Gulf Oil Corporation is, can have no property in this State which is “liable to taxation,” under our laws relating to the capital stock tax, and hence such a tax cannot be properly levied against it, though it may have personal property here which is liable to the personal property tax.

If it is not so liable, the Act of 1913 applies and appellee must pay a personal property tax. “The defendant below being a citizen of this State, it is clear he is subject personally to its power to tax, and that all his property accompanying his person, or falling legitimately within the territorial jurisdiction of the State, is equally within this authority. The interest which an owner of shares has in stock of a corporation is personal. Whithersoever he goes, it accompanies him, and when he dies his domicile governs its succession”: Me-Keen v. Northampton County, 49 Pa. 519, 525; Dupuy v. Johns, 261 Pa. 40, 46.

If the last stated conclusion is not correct, we permit resident holders of valuable shares to escape taxation on the ground that the company whose shares they hold, though stripped of all taxable value so far as its stock is concerned, with no assessable capital, is merely doing business. As first stated, the tax policy is an effort to reach all investments of capital in corporations, except where relieved, as indicated.

The Commonwealth here is not deprived of any tax, and the counties secure that which the legislature intends. In the present case, Gulf Refining Company must account for all the property taxable in Pennsylvania, and it has always so responded. Neither Gulf Refining Company nor its shareholders are injured; Gulf Oil will pay no capital stock tax though accounting for loans, and though its shareholders may not secure the same immunity as subsidiary’s stockholders; they stand in a different sphere and are placed on a par with all other investors in the stock of foreign corporations not taxable for state purposes. Until the legislature adopts a different system of apportionment or division of stock value, one representing capital invested in the Commonwealth and the other outside, we may expect difficult problems presented, and in some cases inequality ; but, if the bars are thrown down, as urged by appellee, personal property tax in Pennsylvania, so far as it. relates to foreign investments, will be a dead letter.

One other question presents itself, and it forcibly illustrates what may be done to escape this personal property tax by means of a very small state tax, illegally assessed. The auditor general, who received and filed a report of the Gulf Company, assessed against it what plainly is a mere nominal tax on capital stock. It is here contended that the auditor general’s report, fixing liability to tax, is conclusive, and the court cannot go behind it. The legislature has seen fit to set up two taxing tribunals, each having equal powers, to determine a fact, to wit, a corporation’s liability to a tax on its capital stock. The auditor general made an assessment or finding; the county, the other cotaxing authority, is in no position to appeal from this action. It could not be heard as a party in interest. If the auditor general’s reports are to be received as conclusive, as that official is diligently looking after the state’s revenues, one can easily see where the counties might suffer. On the other hand, it would be intolerable to have the auditor general’s action subjected to an attack, or set aside indiscriminately, by the sixty-seven county-taxing officials. The court below was in error in holding the report conclusive under the facts in this case. Generally speaking, the reports of the auditor general are not only prima facie evidence, but conclusive, except in case of fraud, legal or constructive, or where the face of the report exhibits an assessment of tax contrary to law, or where the officers of the company admit a situation that makes it nontaxable. The cases relied upon relate solely to situations where efforts were made to resist the collection of a tax assessed by the auditor general, and do not reach the facts in this case. Here, all facts necessary to a decision of the case were sworn to by the secretary of the company, and it naturally followed that some explanation had to be made, when the corporate purpose of the holding company, filing the report, was considered. The auditor general accepted the report, as is usual in that office as to the reports of all companies which make returns. In adjusting and deciding questions of the character which arise in setting a capital stock tax, the auditor general hears one side only, and is often not presented with the real problems in dispute; but, even so, we have sufficient admissions in the present record to show the facts before indicated, and upon them we base our decision, — we are not deciding anything about the right to file a consolidated return.

We now conclude that all the tangible property here involved belongs to the underlying company and all the intangible property is referable to the home of the reporting company, and this corporation, though doing business in Pennsylvania, has no property on which a value may be placed so as to compute a value on its capital stock; consequently, the corporation is not liable to a capital stock tax.

A penalty of fifty per cent for failure to file a personal property return was added, as provided by law. The failure to file the report in this case was due to an honest misconception of the law relative to our taxing statutes. While it is not within our power to relieve appellee from the penalty imposed, we think the board of revision should take this matter into consideration and grant relief as to this item. The county’s desire is not to punish but to have the law definitely settled.

The order of the court below is reversed, the decision of the board of revision is reinstated; the appellee to pay the costs.