CHAPTER VI

TAXATION OF CORPORATIONS

§ 45. Definition and Nature of the Power. It was stated in a preceding section that in the absence of an express exemption, the property of a corporation was subject to the taxing power of the State as one of its inherent and sovereign attributes. The exercise of the power, unless as above stated specifically withheld, does not constitute an impairment of any charter or contract obligation by the State. The power to tax can be exercised both as a regulative measure and also as a source of revenue to the State. The power has been defined as that inherent and continuing power of a State to compel the payment from persons and upon property within its jurisdiction of an involuntary contribution for the maintenance of its organized government. Another definition given by the Supreme Court of the United States1 is to the effect "that taxes are burdens or charges imposed by the legislative power upon persons or property to raise money for public purposes. The power to tax rests upon necessity as inherent in every sovereignty. The legislature of every free State will possess it under the general grant of legislative power, whether particularly specified in the Constitution among the powers to be exercised by it or not."

And Judge Cooley, in his work on Constitutional Limitations, states both a definition and some inherent limitations upon an exercise of the power in the following language:

"While taxation is in general necessary for the support of government, it is not part of the government itself. Government was not organized for the purpose of taxation, but taxation may be necessary for the purposes of government. 1 Ashley v. Ryan, 153 U. S. 436.

As such, taxation becomes an incident to the exercise of the legitimate functions of government but nothing more. No government dependent upon taxation for support can bargain away its whole power of taxation, for that would be, substantially, abdication. All that has been determined thus far is that for a consideration it may, in the exercise of a reasonable discretion and for the public good, surrender a part of its powers in this particular."

§ 46. Corporate Property Subject to Taxation. In the case of Tennessee v. Whiteworth,2 it was held by the Supreme Court of the United States, Chief Justice Waite writing the opinion, that

"In corporations four elements of taxable value are sometimes found: (1) franchises; (2) capital stock in the hands of the corporation; (3) corporate property; (4) shares of the capital stock in the hands of the individual stockholders. Each of these is recognized as an element of a taxable value in a corporation that, subject to constitutional restrictions, can be taxed by the State."

The franchises of the corporation, it has been held in many States, are subject to a separate tax in addition to one on its property of a tangible value or the capital stock of the corporation in the hands of the stockholders or considered as the capital stock of the corporation. The franchises subject to taxation may be the rights and privileges included within the meaning of that word, used either in its primary or secondary sense, the primary meaning being, as previously stated, the right of being a corporation and the exercise of certain ordinary privileges in connection with its existence in a corporate capacity; and, in a secondary sense, the grant of special privileges and exemptions or extraordinary powers not possessed by the people as a matter of common right, or, in some cases, in derogation of common right.

The right of the State to tax the tangible property of a corporation obtains as a matter of course, the only limita2 117, U. S. 129.

tions being those contained in its own Constitution or that of the United States and which will be noted in a succeeding section. Some States have held that the capital stock of a corporation considered as capital stock is subject to taxation independently of the right to levy a tax upon the other elements of taxable value found in a corporation, or upon its stock considered as the personal property of the corporate stockholders.

Shares of stock in the hands of their owners are considered personal property, and as such subject to taxation by the State. A tax upon shares of stock of the corporation may be effected either through an assessment of the property in the hands of the shareholders, or the corporation itself may be compelled to pay the tax and collect it from the stockholders by deducting it from its net profits or dividends. In some States are to be found constitutional prohibitions against double taxation, and it is a serious question whether the taxation of the capital stock in the hands of the stockholders, and also as an arbitrary item of taxable value belonging to the corporation does not constitute double taxation. The weight of authority so regards it. Where no constitutional provision prevents double taxation this is possible, although the courts always construe laws, if possible, so as to prevent it.

§ 47. Methods of Taxation. The four elements of taxable value in a corporation were stated in a preceding section. The methods employed in taxing either one or all of these vary in the different States. Where, by statute, the franchises of the corporation are taxed, some procedure is also provided for the establishment of their value. It might be suggested that where the franchises of a corporation, whether the term is used in its primary or secondary sense, are by statute made elements of taxable value and taxed, in proceedings to ascertain the value of the property invested in a plant for the determination of the question of a reasonable charge made by that corporation for services, a value of the franchises at least equivalent to the taxable value should be included as a part of the capital or the

property invested. A distinction is made by the courts between the taxation of franchises and the levy of a tax on the capital stock of a corporation. The taxation of both has been held not to constitute double taxation.

Various methods are employed to determine the value of the capital stock of a corporation for the purposes of taxation. The reader is referred, for illustration, to the statutes of his own State. In some instances, a tax is levied upon the par value of the stock; in other cases, upon the market value at the time its assessed value is ascertained. In still others, the tax is levied upon the amount of the capital stock named in the articles of incorporation. In some States the capital stock of different corporations is classified and assessed according to the dividends paid, a greater taxable value being placed upon the stock of corporations paying the larger dividends.

The tangible value of the property of a corporation is ascertained according to the methods provided by statute and varies, naturally, in the different States. The total amount subject to taxation is fixed at the value of the property less, in some cases, the property exempt from taxation, property otherwise taxed, and, in many cases, the tangible value of the property less the debts of the corporation. Instead of taxing the actual tangible property of a corporation, this result is often accomplished through the taxation of the dividends, the gross receipts, or the net earnings or profits of the corporation. The reader is referred to the statutes of a particular State for the details establishing the methods and procedure followed by that State in the taxation of corporate property.

The shares of capital stock in the hands of the stockholders is distinguished from the capital stock of the corporation and is subject to taxation as their personal property, even where the tangible property of the corporation has already paid a corporate tax, and, perhaps in addition a tax has been levied and collected upon the capital stock of the corporation in its own hands. Some States, however, provide an exemption from taxation of the shares

of capital stock owned by a private individual residing within the State where these shares of stock constitute a part of the capital stock of a domestic corporation.

§ 48. Limitations Upon the Power of Taxation. While, as a matter of theory, the State can exercise its powers of taxation without limit in this country, as said by Judge Cooley: "Government was not organized for the purpose of taxation." Limitations upon an exercise of the power are to be found in both the Federal and State Constitutions. The agencies of the Federal Government are exempt from taxation by the State. Chief Justice Marshall, in McCulloch v. Maryland, held that the power to tax was the power to destroy, and that if the right of a State to tax agencies of the Federal Government was conceded, it would be possible for the States to impair the efficiency and even to destroy the sovereignty of the Federal Government. The converse of the rule also is true, and the courts have held that it is without the power of the Federal Government to tax the agencies of the separate States employed by them in the exercise of their governmental functions or duties. This rule is stated here for the reason that in some instances the agencies of both the Federal and the State governments have been corporations. National banks organized under the present national banking law are, in respect to the issue of currency, regarded as agencies of the Federal Government, for to the United States is given by the Constitution the sole power of coining money and the States are prohibited from emitting bills of credit. Bonds or other securities issued by the Federal Government are clearly beyond reach of the taxing power of the States.

The provisions of the Federal Constitution with reference to the taking of property without due process of law; the appropriation of private property for a public use without the payment of just compensation; the equal protection of the laws; and the impairment of a contract obligation have all been held by the United States Supreme Court as limitations upon the taxing power of the State where an

24 Wheaton 316.