Northern Cent. Ry. Co. v. Fidelity Trust Co.

• Decision Date: 19 January 1927
• Docket Number: 25.
• Citation: 136 A. 66,152 Md. 94
• Parties: NORTHERN CENT. RY. CO. v. FIDELITY TRUST CO. ET AL.
• Court: Maryland Court of Appeals

136 A. 66

152 Md. 94

NORTHERN CENT. RY. CO. v. FIDELITY TRUST CO. ET AL.

No. 25.

Court of Appeals of Maryland

January 19, 1927

Appeal from Circuit Court of Baltimore City; Henry Duffy, Judge.

"To be officially reported."

Action by the Fidelity Trust Company and another, executors and trustees under the will of Mary Ann Henrietta Watts, against the Northern Central Railway Company. From the decree defendant appeals. Reversed, and bill dismissed.

Argued before BOND, C, J., and PATTISON, URNER, ADKINS, OFFUTT DIGGES, and PARKE, JJ.

Bernard Carter & Sons and Shirley Carter, all of Baltimore, for appellant.

Thomas A. Murray, of Baltimore (F. Murray Benson, of Baltimore, on the brief), for appellees.

URNER J.

In the course of their administration, the executors of the will of Mary Ann Henrietta Watts, a citizen of Maryland, who died in the city of Baltimore, were directed to transfer to the Fidelity Trust Company and Frank W. Watts, trustees under the will, 280 shares of the stock of the Northern Central Railway Company forming part of the decedent's estate. The stock is transferable on the books of the railway company at its principal office in Baltimore. The company declined to make the proposed transfer of the stock from the executors to the trustees without the consent of the state of Pennsylvania evidencing the payment or waiver of an inheritance tax imposed by one of its laws upon transfers of stock of Pennsylvania corporations. The Northern Central Railway Company was formed in 1854 by the consolidation of four railway companies, three of which had been incorporated under the laws of Pennsylvania and one under a Maryland statute. Concurrent legislative acts of the two states authorized the consolidation. Under the dual incorporation thus accomplished, the Northern Central Railway Company operates as a single railroad organization. The Pennsylvania statute imposing the tax in question specifically includes transfers of stock held by nonresident owners. It subjects to a penalty any corporation of that state making a taxable transfer before the prescribed tax has been paid. The question to be decided in this suit is whether, in view of the Fourteenth Amendment of the federal Constitution, the Pennsylvania tax is validly chargeable on the transfer of Northern Central Railway stock, owned by a resident of Maryland and passing as part of an estate administered under its laws, to beneficiaries who are not residents of Pennsylvania.

The effect of the consolidation, under Maryland legislative sanction, of the constituent railway companies forming the Northern Central Railroad system, was to create a corporation of distinctly Maryland origin. While there was a similar and contemporaneous consolidation in Pennsylvania. the creation of the new corporation in this state was an independent exercise of Maryland sovereignty. The legal entity thus brought into existence was as completely a Maryland corporation as though the Pennsylvania consolidation had not occurred. State v. Northern Central R. Co., 18 Md. 193; Id. 44 Md. 131; Id., 90 Md. 447, 45 A. 465; Northern Central R. Co. v. Hering, 93 Md. 164, 48 A. 461. At the same time the Northern Central Railway Company is a Pennsylvania corporation, deriving full and efficient corporate powers from that state. Each of the coexisting corporations bearing that name is invested with the title to the entire railway system mentioned in the Pennsylvania and Maryland statutes by which their creation was respectively authorized. In unity of administration and with respect to their capital stock, they are practically one corporation, but as legal entities they are distinct. It was said by this court, in the first of the cases above cited, that the Northern Central Railway Company--

"must, for the purposes of justice, be treated as a separate corporation by the courts of justice of each government, from which it derives its being, that is, as a domestic legal entity to the extent of the government under which it acts, and as a foreign corporation as regards the other sources of its existence."

The Supreme Court of Pennsylvania, in Allegheny v. Cleveland & Pittsburg R. Co., 51 Pa. 228, 888 Am. Dec. 579, held that the defendant company, having been incorporated first by Ohio and then by Pennsylvania, "became thus a separate corporation in each state." This conclusion was based upon the opinion delivered by Chief Justice Taney, in Ohio & M. R. Co. v. Wheeler, 1 Black, 286, 17 L.Ed. 130.

The relations of a Northern Central stockholder to the two railway corporations of that name are identical. The certificate for his shares represents precisely similar interests in the Northern Central Railway Company in each of its separate capacities as a corporation independently created under the laws of the two commonwealths. In considering, therefore, whether the transfer of the stock involved in this case is taxable by the state of Pennsylvania, we must give due regard to the fact that the stock is not the issue solely of the Maryland corporation, but is equally attributable to the Pennsylvania corporation simultaneously created for the same purposes.

The case of Rhode Island Hospital Trust Co. v. Doughton, 270 U.S. 69, 46 S.Ct. 256, 70 L.Ed. 475, 43 A. L. R. 1374, is said to be conclusive of the question here presented. In that case it was held by the Supreme Court that a North Carolina inheritance tax on the stock of a New Jersey corporation, owned by a resident of Rhode Island, and passing under his will in that state, could not be sustained merely because the corporation was doing business in North Carolina and a large proportion of its property was there located, Mr. Chief Justice Taft said:

"The tax here is not upon property, but upon the right of succession to property, but the principle that the subject to be taxed must be within the jurisdiction of the state applies as well in the case of a transfer tax as in that of a property tax. A state has no power to tax the devolution of the property of a nonresident unless it has jurisdiction of the property devolved or transferred. In the matter of intangibles, like choses in action, shares of stock and bonds, the situs of which is with the owner, a transfer tax of course may be properly levied by the state in which he resides. So, too, it is well established that the state in which a corporation is organized may provide in creating it for the taxation in that state of all its shares, whether owned by residents or nonresidents. Hawley v. Malden, 232 U.S. 1, 12, 34 S.Ct. Rep. 201, 58 L.Ed. 477, 482, Ann. Cas. 1916C, 842; Hannis Distilling Co. v. Baltimore, 216 U.S. 285, 293, 294, 30 S.Ct. Rep. 326, 54 L.Ed. 482, 485, 486; Corry v. Baltimore, 196 U.S. 466, 25 S.Ct. Rep. 297, 49 L.Ed. 556; Tappan v. Merchants' Nat. Bank, 19 Wall. 490, 503, 22 L.Ed. 189, 195.

In this case the jurisdiction of North Carolina rests on the claim that because the New Jersey corporation has two-thirds of its property in North Carolina, the state may treat shares of its stock as having a situs in North Carolina to the extent of the ratio in value of its property in North Carolina to all of its property. This is on the theory that the stockholder is the owner of the property of the corporation, and the state which has jurisdiction of any of the corporate property has pro tanto jurisdiction of his shares of stock. We cannot concur in this view. The owner of the shares of stock in a company is not the owner of the corporation's property. He has a right to his share in the earnings of the corporation, as they may be declared in dividends, arising from the use of all its property. In the dissolution of the corporation he may take his aliquot share in what is left, after all the debts of the corporation have been paid and the assets are divided in accordance with the law of its creation. But he does not own the corporate property. * * * North Carolina cannot control the devolution of New Jersey shares. That is determined by the laws of Rhode Island where the decedent owner lived or by those of New Jersey, because the shares have a situs in the state of incorporation. * * *

In an addendum to its opinion in this case, the Supreme Court of North Carolina suggests that the jurisdiction of the state to tax the shares of the New Jersey corporation may be based on the view that the corporation has been domesticated in North Carolina. So far as the statutes of the state show, it has been authorized to do and does business in the state, and owns property therein and pays a fee for the permission to do so. It has not been reincorporated in the state. It is still a foreign corporation and the rights of its stockholders are to be determined accordingly."

An important difference between the case just cited and the one now under decision is in the fact that the tax here in question is upon the transfer of stock of a corporation created by the state whose power to impose the tax is the subject of inquiry. If the New Jersey corporation had been "reincorporated" in North Carolina, the two cases would be more analogous. In that event the position of North Carolina would have been comparable to that of Pennsylvania in the present case. The principle that shares of corporate stock have a situs in the state of incorporation might then have been found applicable. There was an application of that principle in Welch v. Treasurer & Receiver General (Burrill) 223 Mass. 87, 111 N.E. 774, one of the cases cited with approval in the opinion delivered by Mr. Chief Justice Taft from which we have quoted. In the Massachusetts case one of the inquiries was whether stock of a deceased resident of that state in the Chicago & Northwestern Railway Company, a corporation organized under the laws of Illinois,...