Girard Trust Co., Trustee's Appeal

In 1911 the General Accident Fire and Life Assurance Corporation, Ltd., a corporation formed under the laws of the United Kingdom and registered to do business in Pennsylvania, executed a written agreement with the Girard Trust Company, as trustee, transferring certain securities and property in trust for the uses and purposes therein set forth. The deposit of these securities in some state in the United States was required under the insurance laws: see Section 601, Act of May 17, 1921, P. L. 682. The settlor-insurance company, under the agreement, retained absolute dominion and control over the fund, its investment, reinvestment and general management, and reserved an unqualified power to revoke the agreement at any time after the expiration of one year from the date thereof. The only circumstances under which the Girard Trust Company will acquire any degree of control are in the event that (1) the insurance company's auditors notify the trustee that the reserve is impaired, (2) the company ceases to do business, or (3) the company fails to satisfy a judgment on a policy claim within a fixed time. None of these contingencies appears to have arisen; the insurance company in fact has at all times exercised absolute control over the fund; and the trustee has merely held custody of the fund, the value of the part involved in these proceedings having been $7,271,908 on the assessment date.

On or about January 20, 1937, the assessors for Philadelphia County made an assessment in this amount for the taxable year 1937 against the Girard Trust Company, as trustee, from which an appeal was taken to the Board of Revision of Taxes. This appeal was dismissed, which action was sustained by the court below in a proceeding brought under the Act of May 22, 1933, P. L. 853, section 518.

The appeal under consideration requires a very careful analysis of the Personal Property Tax Act of June 17, 1913, P. L. 507, section 1, last amended by the Act of April 21, 1933, P. L. 54, section 1. The first part of this section provides that "all personal property of the classes hereinafter enumerated, owned, held or possessed by any person . . . or company, resident, located, or liable to taxation within this Commonwealth, or . . . by any . . . bank, or corporation . . . liable to taxation . . . whether such personal property be owned, held, or possessed . . . in his, her, their, or its own right, or as active trustee . . . for the use . . . of any other person . . . company . . . or corporation, — is hereby made taxable annually for county purposes . . . at the rate of four mills. . . ."

These provisions, without more, establish a very broad plane of taxation on personal property, but it is apparent from the succeeding portions of the section that the legislature was endeavoring to lay a four mill tax only on certain species of personal property. When enumerating the various classes of intangible property to be taxed, and providing for definite exemptions, the legislature no doubt had in mind either its legal inability to subject these exempted intangibles to a tax, or that the exempted intangibles had already been taxed in another form for State purposes. In a word, the legislature wished, among other things, to avoid double taxation. There are other exemptions noted which cannot be explained on these two grounds, but rest on other policies.

The types of personal property to be taxed under the Act, or, as the Act reads, "the classes hereinafter enumerated" include: mortgages; all money owing by solvent debtors, such as notes, bonds et cetera; public loans, except those issued by the Commonwealth or the United States; all loans issued by any corporation, et cetera, except those taxed under Section 17 of the Act; all shares of stock, except shares of stock in any corporation that may be liable to a tax on its shares or capital stock for state purposes, or is relieved from the payment of the tax on its shares or capital stock. Other exemptions follow until we read,"provided further, That corporations . . . liable to tax oncapital stock for State purposes, shall not be required to makeany report or pay any further tax, under this section, on themortgages, bonds, and other securities owned by them in theirown right."

It will be observed that in the Act, as thus stated, the exempted property is related to both classes. Exempted property owned, held or possessed by any person or corporation in its own right is not subject to the four mill tax, and it is equally clear that all such exempted property owned, held or possessed by an individual or a corporation as active trustee for the use, benefit or advantage of another person or corporation, is likewise excluded from the tax.

The clause in Section 1 which seems to give trouble, and the one which it is urged challenges this conclusion, is the following: "but corporations, limited partnerships, and joint stock associations, holding such securities as trustees . . . or in any other manner, shall return and pay the tax imposed by this section upon all securities so held by them as in the case of individuals." It should not be doubted at this late date under the practical operation of the Act that a trust res in the hands of trustees, consisting of property specifically exempted by the Act, is free from the tax. If we were to hold, however, that the tax is against the trustee measured by the gross value of the property in the trust, we would subject all the exempted property to tax; and if we were to hold that the words "all securities so held by them" intended to include this exempt property, then, in either case, the words that follow, "as in the case of individuals," would have no place in the Act. If the exempted properties in the hands of individuals would not be taxed, to include in the gross value of an estate, for tax purposes, the value of the exempted properties simply because they happen to be held by a trustee, would wipe out the clear intent and purpose of the legislature to exempt this class ofproperty from tax no matter in whose hands it is held. We conclude, therefore, that the Act intended to exclude such property from the county four mill tax, and that the mere fact that it happens to be held by a trustee in either an active or a passive trust, revocable or irrevocable, should not, and does not, change the status of exempted property included in the trust res.

Since the tax, by the express words of the Act, is imposed only upon property, it cannot be construed to be a tax upon the transaction in placing the securities in trust, measured by their value.

Further, to demonstrate that the trustee, as trustee, is not taxed, he must segregate such property, that is separate the exempted property from the nonexempt, make a report of the nonexempt under the Act and pay the tax. This does not cause the tax to be a tax on the trustee, as such; it is a tax on the property in the hands of the trustee.

The trustee is merely the reporting and collecting agency for the municipal government.

The concluding exemption of property of persons and corporations nonresident or not located within the State or doing business here, held in trust by a Pennsylvania trustee, does not mean that all other classes of property held by a trustee should be subjected to the four mill tax. This exemption must be read in connection with all the other exemptions so as to carry out the full intent and purpose of the legislature that all exempted property, no matter how it is held, is excluded from the tax.

Conceding, then, that the clause in question, quoted above, does not include property exempted in the section, our next concern is whether appellant's property is within any of the classes of exempted property. There are the further questions of whether the legislature intended to include revocable trusts in the class of trusts that are mentioned in the Act, and whether the legislature could include property for tax, the domicile of the real owner being outside of the State and the property here under a deposit or trust that had been ordered and directed by the legislature to be maintained either in this State or some other state. These latter questions, while they are interesting, need not be determined in this opinion. We will concern ourselves only with the question whether or not this property is within any of the exempted classes.

It is apparent that the Act makes two distinct types of property exemption:

(a) Exemption based upon the inherent qualities of the property itself, such as shares issued by a corporation liable to a capital stock tax; Commonwealth and Federal bonds; securities subject to the corporate loans tax, et cetera. This exemption attaches to the property regardless of its ownership.

(b) Exemption which attaches to certain property not because of its inherent qualities, but because of the external fact of ownership. This exemption extends to all property owned by particular taxpayers, such as corporations "liable to tax on capital stock for State purposes."

The mere fact that appellant is a foreign corporation doing business in the State does not exclude it from paying tax on the securities it holds if they are not otherwise exempt, unless an unconstitutional discrimination is effected against it. To bring appellant within any exemption, and exemptions must be strictly construed, it must show that its securities bear a definite and positive relation to the exemption under consideration.

There are two primary considerations in determining whether this property is exempt: First, this foreign corporation pays a gross premium tax for the privilege of doing business: Commonwealth v. Equitable Life AssuranceSociety, 239 Pa. 288. Though we held in Miller's Estate,330 Pa. 477, that the shares of a foreign insurance corporation were not taxable under the former provision of the State Personal Property Tax Act exempting the shares of any corporation "relieved from the payment of a tax on its shares or capital stock for State purposes," the question was not raised in that case whether such shares would also have been exempt because the foreign insurance corporation paid the equivalent of a capital stock tax. That the gross premiums tax is clearly the equivalent of a capital stock tax within the meaning of the exemption is evident from a consideration of the legislative purpose underlying both the exemptions and the tax on premiums. In Dupuy v. Johns et al., 261 Pa. 40, at 49, it was stated that the purpose of the legislature in enacting the exemption clauses was to divide corporations into two groups: "(1) Those doing no business, making no official reports, and paying no capital stock tax in Pennsylvania, upon the stock of which resident shareholders must pay a tax; (2) Those which are bona fide engaged in business here, report to the auditor general, and are either liable to a state tax on capital stock or relieved therefrom by the laws of the Commonwealth, the stock of which is exempt in the hands of resident shareholders." It was held in that case that the purpose was not solely to prevent double taxation, and that therefore it was immaterial that a foreign corporation paid a tax on but a small portion of the capital represented by its shares. When the capital stock tax on foreign corporations was replaced by the franchise tax, which afforded a fairer basis of taxation, this Court held in Arrott's Estate, 322 Pa. 367, that the franchise tax was equivalent to the capital stock tax within the meaning of the personal property tax exemptions. The effect of these decisions is that when a foreign corporation brings itself within the class of corporations doing business within this State, reporting to the auditor general, and liable to a State tax which is in lieu of or equivalent to a capital stock tax, it brings itself and its shares within the exemptions of the personal property tax Act. While the gross premiums tax is not measured by capital stock value, it has been adopted by the legislature as the fairest way to obtain an equivalent taxation of foreign insurance corporations, and as one which bears a substantial relation to the tax paid by similar domestic corporations. We therefore conclude that the gross premium tax of two per cent is equivalent to the capital stock and premium tax paid by other insurance companies within the spirit and purpose of the exemption provisions.

The only matter requiring further elucidation is whether in applying this Act appellant under the circumstances here related is to be considered the owner of the securities. Under the agreement the Girard Trust Company is acting merely as custodian of the securities. Until one of the specified contingencies occurs, this is virtually a deposit for safekeeping, with appellant exercising complete control and dominion over the securities, including the right to terminate the agreement, and receiving the full benefits thereof. The purpose of this arrangement was to comply with this state's statutory requirement that an insurance company of a foreign nation deposit somewhere in this country a portion of its reserve funds sufficient to cover its outstanding United States liabilities, so that those having just claims against it will not have to look beyond the seas for their satisfaction. Such an arrangement does not create an active trust setting up a fund separate and distinct from the capital assets of the company for a purpose other than that for which they would be used if retained by the company. No one could contend that the reserve funds of an insurance company in its own hands constitute an active trust. In the instant case, the funds held by the Girard Trust Company as a deposit to protect United States creditors and policyholders still are as much a part of the capital assets of appellant as if they were in their own hands, subject to its complete control and dominion, and are to be considered as owned by it within the meaning of the tax statute. Appellant is therefore exempt from paying a four mill tax on the property it owns.

There is a stronger reason, however, than this for construing appellant relieved of the tax: While appellant may be subjected to the present levy if other companies of like character are so subjected, domestic insurance companies of like character are relieved from the payment of this tax. To require the tax to be paid by foreign insurance companies would not only be a direct violation of the due process and equal protection clauses of Sections 1 and 9 of Article I of our own Constitution (seeRohrer v. Milk Control Board, 322 Pa. 257, 259), but would be a positive invasion of the Federal Constitution.

Although a foreign corporation may be subjected to unequal taxation as an admission fee, or condition precedent to its admission to do business within the State (Hanover InsuranceCo. v. Harding, 272 U.S. 494, at 510, and see Nugent FuneralHomen v. Beamish, 315 Pa. 345, at 348), once within thejurisdiction it may not be arbitrarily and oppressively discriminated against in favor of similar domestic corporations. See Southern Ry. Co. v. Greene, 216 U.S. 400;Air-Way Electric Appliance Corp. v. Day, 266 U.S. 71; QuakerCity Cab Co. v. Com. of Pennsylvania, 277 U.S. 389; Liggett Co.v. Baldrige, 278 U.S. 105; Nugent Funeral Home v. Beamish315 Pa. 345, 349. In Hanover Insurance Co. v. Harding,272 U.S. 494, a tax on the full value of net receipts imposed only on foreign corporations, which also paid a two per cent gross premium tax on the privilege of doing business and the same personal property tax as domestic corporations, was held to effect a denial of equal protection, because foreign corporations were required to pay upon the full valuation of receipts, whereas domestic corporations were required to pay only the personal property tax based upon a reduced valuation. It was urged there that the discrimination was sustainable as an additional condition upon the continuing privilege of the foreign corporation to transact business in the State, but the Court rejected this conclusion, holding that after admission it is "put on a level" with domestic corporations. And it was held that though the tax was held by the state courts to be a privilege tax, it bore no relation to the power of the State to exclude or impose conditions upon foreign corporations seeking to enter.

In Bethlehem Motors Corporation v. Flynt, 256 U.S. 421, a license tax on sales by automobile manufacturers was held to be discriminatory and unconstitutional as applied to foreign corporations doing business in the State because the taxing statute permitted a reduction amounting to four-fifths of the tax under conditions which could be met only by domestic corporations. In Concordia Insurance Co. v. Illinois,292 U.S. 535, it was stated that, if it had been shown in that case that a net receipts tax levied on foreign corporations effected discrimination in the tax burden against foreign corporations, it would violate the equal protection clause. In the most recently decided case, Connecticut General Life Ins. Co. v.Johnson, 303 U.S. 77, it was said with reference to a tax imposed on reinsurance premiums paid in the home state of foreign insurance corporations admitted to do business: "A corporation which is allowed to come into a state and there carry on its business may claim, as an individual may claim, the protection of the Fourteenth Amendment against the subsequent application to it of state law." In holding the tax a violation of the due process clause, the Court cited with approval the Hanover case.

The reasoning of these cases applied to the present tax clearly shows its unconstitutionality. A foreign insurance corporation pays a two per cent gross premium tax to the Commonwealth upon the privilege of entry and doing business: Com. v. Equitable Life Assurance Soc., 239 Pa. 288. Once having met this condition, and having undertaken the transaction of business here, the corporation is thereafter entitled to reasonable equality with domestic corporations in the matter of taxation. This does not require identical treatment. Substantial equality is the test. As was stated inConcordia Insurance Co. v. Illinois, 292 U.S. 535, at 547: "Mathematical equivalence is neither required nor attainable; nor is identity in mere modes of taxation of importance where there is substantial equality in resulting burdens."

The nature of foreign insurance corporations makes a capital stock tax impracticable and the legislature has chosen the gross premiums tax as the best method of equalizing the tax burden of the foreign corporation with that of the domestic insurance corporation. To impose upon a foreign insurance corporation already within the jurisdiction an entirely separate and additional tax, from which domestic insurance corporations are expressly exempt, would be burdening the former with an oppressive and arbitrary disadvantage, not justified by any fundamental difference in the two types of corporations, or in their relations with the State. Such an arbitrary discrimination would clearly violate the equal protection clause. In Paul's Estate, 303 Pa. 330, at 335, we said: " 'Taxation is an intensely practical matter and laws in respect to it should be construed and applied with a view of avoiding as far as possible unjust and oppressive consequences,' " citing Farmers' L. T. Co. v. Minnesota,280 U.S. 204, at 212.

These considerations fortify the construction placed upon the exemption provisions of the Act. The legislature should not be presumed to have intended an unconstitutional and unjust result. For these reasons, this property is not taxable.

It cannot be doubted that if the foreign corporation held this property individually in its strong box it could not be subjected to the tax. Instead of using its strong box, owner-appellant has here used the Girard Trust Company as a custodian, retaining and exercising complete dominion and control over the securities and enjoying the full benefits thereof. The placing of securities in the hands of a resident trustee or agent for the purposes here present, does not constitute such a change of ownership as would take away the badge of exemption the property bears in the hands of the owner-appellant.

Decree reversed at appellee's cost.