Malley v. Old Colony Trust Co.

• Decision Date: 17 April 1924
• Docket Number: 1652.
• Parties: MALLEY, Collector of Internal Revenue, v. OLD COLONY TRUST CO.
• Court: U.S. Court of Appeals — First Circuit

299 F. 523

MALLEY, Collector of Internal Revenue, v. OLD COLONY TRUST CO.

No. 1652.

United States Court of Appeals, First Circuit.

April 17, 1924

Rehearing Denied June 10, 1924.

On Petition for Rehearing.

S Duffield Mitchell, Asst. Sol. of Internal Revenue, of Washington, D.C. (Robert O. Harris, U.S. Atty., and Albert F Welsh, Asst. U.S. Atty, both of Boston, Mass., and Nelson T Hartson, Sol. of Internal Revenue, of Washington, D.C., on the brief), for plaintiff in error.

Ripley L. Dana, of Boston, Mass. (Stanley E. Gifford and Pillsbury, Dana & Young, all of Boston, Mass., on the brief), for defendant in error.

Before BINGHAM and JOHNSON, Circuit Judges, and HALE, District Judge.

JOHNSON Circuit Judge.

In this case the construction and application of section 3 of the Act of Congress approved October 22, 1914, 38 Stat. 750, known as the War Revenue Act, are in issue. This act is as follows:

'That on and after November first, nineteen hundred and fourteen, special taxes shall be, and hereby are, imposed annually as follows, that is to say:

'First. Bankers shall pay $1 for each $1,000 of capital used or employed, and in estimating capital surplus and undivided profits shall be included. The amount of such annual tax shall in all cases be computed on the basis of the capital, surplus, and undivided profits for the preceding fiscal year. Every person, firm, or company, and every incorporated or other bank, having a place of business where credits are opened by the deposit or collection of money or currency, subject to be paid or remitted upon draft, check, or order, or where money is advanced or loaned on stocks, bonds, bullion, bills of exchange, or promissory notes, or where stocks, bonds, bullion, bills of exchange, or promissory notes are received for discount or sale, shall be a banker under this act: Provided, that any postal savings bank, or savings bank having no capital stock, and whose business is confined to receiving deposits and loaning or investing the same for the benefit of its depositors, and which does no other business of banking, shall not be subject to this tax.'

The Old Colony Trust Company, herein called the plaintiff, is a Massachusetts banking corporation, and was during the years 1914, 1915, and 1916 engaged in banking in the city of Boston, and in connection with banking it had six distinct lines of business:

(1) A trust department, in which it carried on the business of acting as executors, trustees, or other fiduciary and as agent; (2) A transfer department, in which it acted as transfer agent and registrar of stocks and registered bonds;

(3) A safe deposit department, in which it provided a method of safe-keeping for securities for the public and for itself;

(4) A reorganization department, in which it acted as depositary for stocks and bonds in reorganization proceedings;

(5) A bond department, in which it sold bonds and stocks to a limited extent; and

(6) A savings department, in which it received savings deposits and loaned and invested the same;

Its capital stock was $6,000,000; surplus, $8,000,000; undivided profits for 1914, $1,350,000; 1915, $1,198,890; 1916, $708,766.

It paid, under protest, a tax assessed upon its total capital, surplus, and undivided profits for each of the years in question.

The case was sent to an auditor under a rule authorizing him--

'to hear the parties and their witnesses, to examine their books, vouchers and evidence and to make report thereof with his findings of fact thereon to the court.'

A jury trial was waived, and the evidence before the trial court consisted of the auditor's report, which is incorporated in the record, the testimony of one Joseph S. McCoy, in the form of an affidavit, which the plaintiff agreed might be admitted, subject to its objection that the facts contained therein were not material to the issue in the case, a resolution of the Senate of the United States and a letter of the Secretary of the Treasury, as they appear in the 'Congressional Record' (volume 51, pt. 16, pp. 16376 and 16574), respectively, also admitted subject to the plaintiff's objection.

The first question raised by the assignments of error is: Were taxes for the years in question legally assessed upon the total capital stock, surplus, and undivided profits? We regard this question as settled by the United States Supreme Court in Fidelity & Deposit Co. v. United States, 259 U.S. 296, 302, where the court discusses the contention there made that all the capital of the bank was subject to the tax and said at page 302 (42 Sup.Ct. 511, 514, 66 L.Ed. 948):

'The act of 1898 applies to individual bankers as well as to corporations. Surely Congress could not have intended to tax as capital employed in banking the whole net property of an individual banker. Yet the possession of large wealth would probably aid him in attracting depositors, and all his property would, if required, be available legally, and possibly in fact, to meet requirements of his banking business. That apportionment of the capital of a company among its several departments can and should be made for purposes of taxation has been held by lower courts in cases arising under section 3 of the Act of Congress October 22, 1914, c. 331, 38 Stat. 745, 750, which is substantially the same as the provision here in question. They recognize that the question whether the capital was used in the banking business, and if so to what extent, is a question of fact.'

The court then cites in a footnote Anderson v. Farmers' Loan & Trust Co., 241 F. 322, 154 C.C.A. 202; Title Guarantee & Trust Co. v. Miles (D.C.) 258 F. 771; Real Estate Title Insurance & Trust Co. v. Lederer (C.C.A.) 263 F. 667; and for comparison Central Trust Co. v. Treat (C.C.) 171 F. 301; Treat v. Farmers' Loan & Trust Co., 185 F. 760, 108 C.C.A. 98; Fidelity Trust Co. v. Miles (D.C.) 258 F. 770; Germantown Trust Co. v. Lederer (C.C.A.) 263 F. 672.

The affidavit offered, as well as the resolution and the letter, were therefore irrelevant and immaterial. See Real Estate Title Insurance & Trust Co. v. Lederer (D.C.) 291 F. 265, affirmed by the Circuit Court of Appeals for the Third Circuit in 295 F. 672.

The other questions relate to rulings of the District Court:

First. That only those transactions constitute banking which fall under the definition of a banker given in the statute, and that that part of the plaintiff's capital, surplus, and undivided profits which was not used or employed by the plaintiff in banking, within the meaning of the statute, could not lawfully be made the basis of a tax.

Second. The assets of the plaintiff carried as real estate loans, unsecured loans, bond department securities, nine-tenths of the assets carried as vaults, and such part of the assets carried as real estate as include one-half of the plaintiff's main office on Court street and the Washington street building, were not used or employed during any of the fiscal years in question by the plaintiff in the business of banking, as defined by the statute.

Third. 'In the absence of evidence tending to prove the investment of the plaintiff's capital, surplus, and undivided profits in specific assets, it is to be presumed that its capital, surplus, and undivided profits were invested ratably in its total assets.'

Fourth. 'A proper method of determining the part of the plaintiff's capital, surplus, and undivided profits not used or employed in banking is to determine the part of its total assets not so used or employed, and when that is done the same proportion of its capital, surplus, and undivided profits must be taken as not so used or employed.'

Fifth. 'It is the use or employment of the assets of the plaintiff, and not the source from which its assets were derived, which tend to prove the actual use or employment of its capital, surplus, and undivided profits.'

The District Court has found that the assets and liabilities of the trust and savings departments were kept separate from its other assets and liabilities; that all other assets were subject to all its liabilities; that all the assets of the plaintiff were derived from money paid in by stockholders from deposits and its own earnings, and that some of these assets have been invested by the plaintiff in a variety of investments; that the plaintiff has never made any attempt to segregate these investments, so as to show that any particular investment represented money paid in by stockholders or by depositors or earnings; and that the debts of the plaintiff are represented by its deposit liabilities to individuals and corporations, amounts due to other banks, and a small amount included in an account entitled 'Reserve for Taxes.'

It has also found that the average daily assets of the plaintiff, exclusive of the assets in its savings department, for the three taxable years, were distributed among the following classes:

Real estate loans, secured loans, unsecured loans, reserve bank balances, other bank balances, exchanges for clearing house, cash, coupon notes, investments, bond department securities, vaults, real estate, and for the year 1916 stock of Federal Reserve Bank.

The auditor in his report stated that on the evidence before him he was unable 'to find the average daily assets of the savings department of the plaintiff, or the part thereof represented by any specific kind of assets, for any of the years in question,' and the only finding made by the court in regard to assets in the savings department is the following:

'Of the assets in the savings department of the plaintiff on June 30, 1914, approximately $50,000 were represented by loans on collateral and by cash reserves. The remainder of the assets was invested in stocks and bonds, real

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