"This
is an appeal by the corporation defendant from the settlement
of an account against it, by the auditor general and state
treasurer, for tax on capital stock for the year ending the
first Monday of November, 1892, and it was tried by the court
without a jury under the act of April 22, 1874.
"FINDINGS
OF FACT.
"1.
Defendant is, and was during the year 1892, a corporation of,
and doing business in the state of Pennsylvania, chartered in
April, 1890, with an authorized capital of $1,000,000, of
which $400,000 was paid in prior to June, 1892, and the
balance at that time. Its railroad is located in the
anthracite coal region of eastern Pennsylvania, and,
including branches, is about sixty miles in length. It runs
in a devious course, and thus, and by means of branches from
the main line, reaches a number of collieries, nearly all of
which are owned and controlled by the firm of Coxe Brothers &
Company, who also own nearly all the shares of stock in the
railroad company; it was built for the purpose of connecting
these collieries with the various railroads which traverse
that region, and does cannect with the Pennsylvania, the
Reading, the Lehigh Valley, and the Jersey Central railroads;
thus giving the owners of these collieries, and of this
railroad, not merely access to the various markets for coal,
-- east, north and west -- but also choice of roads over
which to reach these markets, and with which to make traffic
contracts. Nearly all the freight carried by the defendant is
coal, and should this traffic fail, or be withdrawn, its
capital stock would be comparatively valueless; but [there is
no evidence in the case tending to show that there is any
present prospect that this will occur, and, in view of the
fact that this railroad and these collieries are owned by the
same persons, it does not seem probable, so long as the coal
mines are not exhausted; nor is there any evidence that this
will take place for many years to come.]
"2.
The gross earnings of the defendant during the tax year 1892
were $739,914.15, and its net earnings were $523,243.15, and
it made one dividend during the year, on October 15, 1892, of
forty (40) per cent, amounting to $400,000, out of net
earnings realized to June 30, 1892; its net earnings June 30,
1892, to February 28, 1893, were about $450,000, and the
amount of its surplus on the first Monday of November, 1892,
was $242,142.89, in addition to book accounts amounting to
about $100,000 in excess of its current indebtedness; and
[there is no evidence in the case tending to show that its
net earnings will be less in the future, except in so far as
they may be affected by the general financial depression.]
The total cost of defendant's railroad, which was
completed in February, 1893, including equipment, was
$1,159,323.70.
"3.
Defendant's president and treasurer made to the auditor
general under the sanction of the prescribed oath, the report
and appraisement required by section 4 of the act of 1891,
P.L. 229, appraising defendant's capital stock at
$2,000,000, which is double its par value. There were no
sales of shares of the stock during the tax year.
"4.
The auditor general and state treasurer were not satisfied
with, and did not accept this appraisement, but, as they
understood to be their duty under the law, made an
appraisement and fixed the value of said capital stock at
$8,720,719.16. In making this appraisement they had before
them no other evidence of its actual value than that
contained in the report made by the officers of the
corporation, as above stated; and this amount was adopted by
them as the value of the capital stock, because it was the
sum which at six per centum would produce $523,243.15, the
amount of net earnings made by the defendant, as shown by
said report. On this valuation, so made by the auditor
general and state treasurer, an account was settled against
defendant for tax, at the rate of five mills, amounting to
$43,603.60 from which settlement defendant duly appealed to
this court.
"[5.
We find from the evidence that the actual value in cash of
defendant's capital stock, between the 1st and 15th days
of November, 1892, was not $8,720,719.16, the amount at which
it was appraised by the auditor general and state treasurer;
but having in view all the evidence and considering all of
the facts which are, in our judgment, relevant, on the
principles more fully explained below, we find that the
actual value in cash of defendant's capital stock at the
date mentioned was $4,000,000.]
"[We
have decided in opinion recently filed in Commonwealth v
Sharon Coal Co., 23 June Term, 1893, and
Commonwealth v. Edgerton Coal Co., 21 June Term,
1893, [affirmed in 164 Pa. 284,] that the intent and meaning
of section 4 of the revenue act of 1891, P.L. 229, is that
only so much of the income of a corporation -- using this
word as an equivalent for both net earnings and amount of
profit made -- as is 'made and either declared in
dividends or carried into surplus or sinking fund,' is to
be taken as the test of minimum value in appraising the
capital stock of a corporation; and that the amount and rate
per cent of dividends made and the amount carried into
surplus or sinking fund during the tax year do not furnish an
absolute indication or measure of the actual value in cash of
the capital stock, but are to be considered with all other
relevant facts in determining what is its actual value in
cash.
"These
decisions settle, for us, the law of this case on the points
thus decided, and lead to the result that the appraisement
made by the auditor general and state treasurer, and the
settlement based thereon, cannot be sustained merely as a
conclusion of law, but must stand or fall on the actual facts
of the case. In other words, the question we have to decide
on this appeal is, what is the actual value in cash of
defendant's capital stock.]
"It
has been settled by numerous decisions, which are cited and
affirmed in Commonwealth v. Standard Oil Co., 101
Pa. 119, that the tax on capital stock imposed by the taxing
acts of this state is not a franchise or license tax, but is
a tax on the property and assets of the corporation. But it
by no means follows that the capital stock and the tangible
property and assets are identical either in substance or in
value. [The capital stock, it is true, represents the
property and assets of the corporation, but it represents
also the value of its franchises and privileges and
facilities for doing business, and the success with which the
business is actually carried on, so far as these are denoted
and expressed by the pecuniary results realized; and the tax
on capital stock is, by the express terms of the act of 1891,
intended to reach those elements of value. See preamble 6,
P.L. 1891, p. 229.]
"The
case of Commonwealth v. Hamilton Mfg. Co., 12 Allen
298, contains an admirable discussion and exposition, by
BIGELOW, C.J., of the difference which may exist between the
value of the tangible property and assets of a corporation
and the value of its capital stock, which is so apt for our
purpose that we make copious extracts therefrom, with the
remark that the whole opinion ought to be read in this
connection. Assuming that the value of the capital stock of a
corporation is equal to the value of all its shares -- the
theory of the act of 1891, which makes the market price of
the shares a test of the actual value of the capital stock --
he says: 'The aggregate market value of all shares, by
which we understand the cash price for which the shares will
sell in the market, does not necessarily indicate the actual
value or amount of property which a corporation may own. The
price for which all the shares would sell may greatly exceed
the aggregate of the corporate property, or it may fall very
far short of it. Undoubtedly the amount of property belonging
to a corporation is one of the considerations which enter
into the market value of its shares; but such market value
also embraces other essential elements. It is not made up
solely by the valuation or estimate which may be put on the
corporate property, but it also includes the profits and
gains which have attended its operations, the prospect of its
future success, the nature and extent of its corporate rights
and privileges, and the skill and ability with which its
business is managed. In other words, it is the estimate put
on the potentiality of a corporation, on its capacity to
avail itself profitably of its franchise, and on the mode in
which it uses its privileges as a corporate body, which
materially influences and often controls its market value. .
. . There may be two corporations organized with similar
powers, having the same number of shares, the same amount of
property, of capital, and both may be engaged in the same
branch of business. The market value of the shares in one
corporation may be double that of the other, because one is
prosperous and likely to make large gains, while the other is
unsuccessful, and is carrying on a business which may prove
unprofitable, or lead to heavy loss. . . . The tax is
therefore laid, not on capital stock as signifying the money
paid in to carry on the business of the corporation, or the...
