HD
UC-NRLF
...e Development ot Corporation
Taxation in the State of New York
A THESIS
Presented to the Faculty of the Graduate School
of Cornell University for the Degree of
DOCTOR OF PHILOSOPHY
MERLIN HAROLD HUNTER
EXCHANGE
THE DEVELOPMENT OF CORPORATION
TAXATION IN THE STATE OF NEW YORK
A THESIS
Presented to the Faculty of the Graduate School
of Cornell University for the Degree of
DOCTOR OF PHILOSOPHY
BY
MERLIN HAROLD HUNTER
PUBLISHED BY THE AUTHOR
URBANA, ILL.
1917.
PRESS OF
THE CALLIHAN 8t STOTTLEMIRE CO.
CAMBRIDGE. OHIO
INTRODUCTORY NOTE
The purpose of this study is to trace in outline the
development of the system of taxing corporations in the
state of New York. Some consideraion is also given to
problems which have arisen under the present tax laws.
Special emphasis has been put upon the legislative history
of corporation taxes and upon the judicial interpretation
of the stautes enacted. From among the great mass of
statutes and court decisions bearing upon the subject I
have tried to select the more important, and to discuss
them in such a way as to show the general lines along
which the tax system has devoloped. I have also tried
to show, where possible, the more important influences
which weighed with courts and legislature. The conclu-
which have been drawn from laws, cases, and reports
cited in the text are, in general, bolstered up by many
which are not cited.
In the preparation of the study, I have been materially
assisted by professor Allyn A. Young of Cornell Univer-
sity, under whose direction the work was done. Pro-
fessor T. S. Adams of Yale University, Prof. C. O. Rug-
gles of Ohio State University, and Professor J. R. Turner
of New York University have also given valuable sug-
gestions. The services of others, who have assisted by
reading the manuscript and proof, I wish also to acknow-
ledge.
M. H. HUNTER
Urbana, 111., September, 1917.
387317
TABLE OF CONTENTS
CHAPTER I
THE GENERAL TAXATION OF CORPORATIONS BEFORE 1880 Page 1
Personal property tax developed early in the Colonial history
Early charters to turnpike companies contained regulatory provis-
ions The law of 1823 was the first to specifically tax corporations
By laws of 1827-28 a corporation in receipt of no profit was not
taxable Many commutation provisions are found in the early laws
After much litigation the legal nature of a corporation was es-
tablished The meaning of "net income" caused much litigation
Changes were made in taxing corporations in 1853 Classification
was soon introduced -Under the commutations allowed much fraud
was practiced Much litigation was caused by the law of 1853
Many inequalities resulted from the assessments Officials pro-
posed remedies but without immediate results Legislature aroused
to action in 1879 Law modified in 1880.
CHAPTER II
THE GENERAL TAXATION OF CORPORATIONS Page 21
The law of 1880 is the basis of the annual franchise tax By
law of 1880 corporations were classified according to dividends paid
Not all corporations were included in the law Defined as a tax
on franchise in 1881 Action of the legislature was criticised by
the press The changes of 1880 were received favorably by State
officials yet other reforms were advocated State Assessors give
new ideas concerning corporate taxation Low tax rate attributed to
corporation taxes Litigation which arose firmly established the law
Injustice to foreign corporations removed by taxing only the
part of the capital employed in the state Tax system condemned
because of the unjust burden upon real estate Question of taxing
indebtedness was much discussed Organization tax was adopted
in 1886 Organization tax modified by the courts and the legisla-
ture Some corporations evaded full share of taxes Courts were
often called upon to interpret the laws The law of 1880 as amend-
ed in 1896 and 1906 constitutes the present annual franchise tax
Some corporations are exempt from the annual franchise tax.
Courts have not always been consistent in deciding questions aris-
ing under the law.
CHAPTER III.
PROBLEMS AND DIFFICULTIES OF THE GENERAL TAX ON
CORPORATIONS. Page 39.
The law of 1880, by introducing indirect taxation, attempted
to eliminate the evils that existed under direct taxes System suc-
cessful from standpoint of revenue and cost of collection Dim-
culty exists in determining the value of capital stock Complexity
of the law is a disadvantage In some cases heavy burden falls on
real estate Methods employed for dealing with delinquent cor-
porations not satisfactory System has been criticised because the
same burdens have not been placed upon corporations and individuals
The assessment of corporate property for local purposes presents
many difficulties The valuation of real estate constitutes a special
problem Method prescribed for assessing capital stock for local
purposes too complex to be used Tax officials and organizations
have asked for modifications Organization tax opposed because it
"drives capital from the state" Separation of state and local reve-
nues not wise Bill introduced in 1881 proposed a stock transfer
tax Stock transfer tax adopted in 1905 Tax on transfers of stock
not class legislation Evasions have been checked but not elim-
inated by changes in the stock transfer tax law Any increase in
rate should be left to meet emergency.
CHAPTER IV
THE TAXATION OF FOREIGN CORPORATIONS. Page 57
Treatment of foreign corporations has varied widely First
laws affecting foreign corporations applied only to insurance com-
panies Law of 1851 was favorable to foreign capital Courts inter-
preted the early law at many points Retaliatory insurance in-
troduced in 1865 Foreign corporations evaded the tax by estab-
lishing agencies in the state Foreign manufacturing concerns to
a great extent escaped taxation Legislature modified the law in
1880 Corporations sought to defeat the new legislation and much
litigation resulted The law proved practically a dead letter Sys-
tem of taxing foreign bankers modified in 1894 License tax im-
posed in 1895 Foreign insurance taxation modified in 1892 Or-
ganization or license tax was productive Modifications in the laws
caused litigation Much foreign capital escapes which the law in-
tends to tax Governor and State officials asked for modifications
Law of 1896 basis of present tax on foreign corporations 'Two
conflicting policies have been followed in dealing with foreign cor-
porations Equality of tax burden should be secured as between
foreign and domestic corporations Same basis should be used for
both domestic and foreign corporations.
CHAPTER V
TAXATION OF INSURANCE COMPANIES AND MANUFACTURING
CORPORATIONS. Page 77
Domestic insurance companies first taxed under the general
tax laws Rise of mutual companies created a new problem Opin-
ion advanced in 1879 that insurance required distinct treatment
Tax officials asked for modifications and the legislature responded
in 1880 Tax did not prove productive The determination of the
surplus of insurance companies proved difficult Variance of opin-
ion as to what extent life insurance companies should be taxed
From the nature of insurance companies they should fit in with
the general tax system Tax on gross premiums most used Tax
on gross premiums open to valid objections Systems used do not
VI
meet the theoritical and practical tests of justice Policy of en-
couraging manufacturing interests has been followed More len-
iency than has been shown has been advocated Law of 1880 made
concessions to manufacturing companies Manufacturing capital
is assessed locally for local purposes Manufacturing companies
should bear their share of the public burden Problem is that of
taxing capital in general.
CHAPTER VI.
TAXATION OF BANKS. Page 94
Bank stock taxed under the first law taxing corporations
Complaints were taken directly to the legislature Banks consid-
ered corporations Bank surplus taxed under the law of 1853
Most radical change in bank taxation came in 1865 Difficulty arose
from taxing capital invested in United States securities Law of
1865 declared unconstitutional Debts could not be deducted from
assessments Decisions of the courts were unexpected State offi-
cials condemned the inequalities in bank assessments Assessment
in conformity to the law would have caused inequality Bank capi-
tal was reduced Bill for the relief of banks defeated in the as-
sembly in 1887 State officials criticise the severe bank taxation
The dissatisfaction was not merely a clamor stirred up by the
banking interests In 1878 court held that debts must be deducted
from assessments "Moneyed capital in the hands of individuals"
defined by the court Law changed in 1901. Recent complaints have
come from interests located without the state Present system of
taxing banks considered satisfactory Banks should not be taxed
so much as to hinder capital seeking that form of investment
The taxation of bank deposits a much discussed question The
taxation of savings banks has had a separate hstory Dfficulty has
arisen in determining the value of the surplus The taxation of
deposits in saving banks has been much discussed Small tax on
deposits would work but little hardship Trust companies have
been treated differently from other banks.
CHAPTER VII.
TAXATION OF RAILROADS AND OTHER PUBLIC SERVICE
CORPORATIONS. Page 122
For many years public utility companies were taxed under the
general tax law Favoritism shown to state projects Difficulties
arose in assessing the property of railroads Railroads removed
from the scope of the general tax system in 1857 General property
tax used Special Tax Commission condemned the system in 1871
Telegraph companies were assessed only on their personal prop-
erty The taxation of public utilities was generally criticized
Courts differed in the methods prescribed for assessing real estate
System for taxing transportation companies changed in 1882
This system, as modified in 1896, is practically the present system
Much litigation has arisen but mostly in connection with local as-
sessments Courts alternated between cost of reproduction and
earning power in formulating rules for valuation Taxation for
local purposes still the cause of much complaint Gross earnings
VII
tax partially used in New York and has advantages Ontario Tax
Commission upheld the gross earnings tax for railroads Some
state tax commissions advocate the gross earnings tax Gross earn-
ings tax has serious difficulties and some states have given it up
A tax on net earnings has been advocated by some authorities
The net earnings tax has serious difficulties The ad valorem
method depends on the competency of the board Some form of unit
taxation would prove more satisfactory than the system now in
use in New York.
CHAPTER VIII.
THE SPECIAL TAXATION OF PUBLIC SERVICE
CORPORATIONS. Page 151
Governor Roosevelt primarily responsible for the special fran-
chise tax The bill as first passed was defective yet the governor
refused to veto it but called a special session of the legislature to
amend it The special session was unpopular with the legislators
and the public Special franchises are assessed as real estate
The press was generally favorable to franchise taxation Special
franchises are taxed as real estate to get around difficulties in the
general tax law The assessment and valuation of the special fran-
chise has proved particularly difficult Counsel designated by the
Attorney General prescribed a method for valuation Board of Tax
Commissioners at first met with many difficulties and were criticised
All special franchises of less than 250 feet in length were removed
from the action of the law but later those in incorporated villages
were added The Tax Commissioners approved the law as a matter
of justice The statute has caused an enormous amount of litiga-
tion Corporations were criticised for contesting the law Tax
Commissioners were given the power in 1911 to equalize special
franchise assessments with other assessments. Statute has proved
to be one of the most arbitrary and complicated parts of New
York's tax system Many difficult questions arise in applying the
law Companies were exploiting the public through the franchise
and no weapon seemed so readily available as taxation Regula-
tion by a public service commission is a method more recently used
to secure justice Public utility property should be taxed to the
same extent as other property. Should have some system of unit
taxation assessed by a central board.
CHAPTER IX.
SUMMARY OF NEW YORK LAWS TAXING
CORPORATIONS. Page 169.
VIII
CHAPTER I
THE GENERAL TAXATION OF CORPORA-
TIONS BEFORE 1880.
DEVELOPMENT OF GENERAL PROPERTY TAX
It will be profitable to sketch briefly the general system
of taxation in New York before a special tax was im-
posed upon corporations. We find that the personal prop-
erty tax developed almost with the beginning of the col-
ony. 1 Under the Dutch rule Peter Stuyvesant, as early
as 1654, succeeded in having an "honest and fair tax"
placed upon "land, houses or lots and milch cows or draft
oxen." The tax was more highly developed on Long
Island than elsewhere. During the English occupancy of
the colony, 1664-1674, the Duke of York enforced a prop-
erty tax upon Long Island, and when the Dutch regained
ascendency funds were secured by taxing the wealthiest
citizens. This class included all who possessed more than
two hundred dollars.
The results of these unsystematic attempts were only
partially successful. After the establishment of the colon-
ial assembly in 1683, the general property tax was de-
veloped in a more uniform way. The principle of assess-
ing every person in proportion to his aggregate property
was the fundamental rule. In the "tax and assessment"
law of 1683 the first of its kind provision was made
1 For an excellent general history of these matters, see J. C.
Schwab, "History of the New York Property Tax," Publications of
American Economic Association, Vol. V.
2 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
for the election of assessors, the assessment of property,
and the election of a treasurer. The method for disburs-
ing the money raised was also included. Two of the dif-
ficulties of the general property tax soon appeared dis-
honesty of officials, and incorrect and partial assessment
of property. In less than ten years after the passage of
the act the assembly appealed to the governor for some
method of equalizing assessments. The interference of
higher authorities, and the establishment of flat rates of
assessment for different classes of property were used to
improve matters. Fundamentally, however, the law re-
mained the same throughout the eighteenth century, al-
though various amendments indicate that the operation
of the law was not thoroughly successful.
The property tax in New York was from the first
couched in general terms, and hence was in principle a
true "general property tax." In most of the other col-
onies certain specific objects of taxation were defined, and
the value regulated by law. 2 Where land was taxed it
was divided into different grades, and so were horses,
cattle, etc. The necessity of holding land before being
admitted to the full rights of citizenship, and the provision
of the federal constitution forbidding states to levy export
or import duties, were conditions which helped to tighten
the grip of the general property tax. This tax became so
thoroughly intrenched that when any new object of taxa-
tion appeared, it was inevitable that an attempt should
be made to put it under the property tax. When the cor-
porate form of organization began to become important,
the problem of taxation naturally appeared to be one of
merely extending the application of the general property
tax.
EARLY TREATMENT OF CORPORATIONS
Before any general law relating to the taxation of
corporations was enacted, there were a number of import-
ant developments in the policy of the state towards this
problem. Turnpike and bridge companies formed by far
3 In Rhode Island, Delaware and Maryland, as well as in New
York, the general property tax was in force.
DEVELOPMENT OF GENERAL PROPERTY TAX 3
the largest proportion of early business corporations.
Most of the laws granting charters to such companies
contained regularatory provisions, which, while not im-
posing taxes, required certain payments from the com-
panies. 3
Before 1823 there was no law which specifically taxed
corporations. The tax law of 1800, however, had pro-
vided that shares should be deemed personal property. 4
The turnpike law of 1807 likewise declared the shares of
such organizations to be personal estate. 5 We have evi-
dence, moreover, that corporations were taxed under the
general property tax law. In the case of The People vs
Ithaca Insurance Company? Martin Van Buren, Attor-
ney General, cited the case of the Clinton Woolen Manu-
facturing Company vs Morse and Bennett, 1 and said that
in that case the opinion was given "that under the act for
the assessment and collection of taxes 8 corporations are
liable to be taxed for property owned by them; yet the
act speaks only of persons liable to be assessed and the
term corporation is not used at all." Thus, in the first
definite recognition of the corporation as an object of
taxation, it seems to have been dealt with in exactly the
same way as a natural person. Doubtless the litigation
arising from this method of handling the problem was a
factor leading to the passage of the law of 1823 the first
statute dealing specifically with the taxation of corpora-
tions.
8 The first act of this kind was one creating the Quaker Hill Turn-
pike Company, (Chap. LXVI, 1802). It provided for inspectors to
be appointed by the Governor, and paid by the company. Regula-
tory provisions are found in practically all laws granting such char-
ters before 1807. In that year a general turnpike company law was
enacted. This provided for the appointment of commissioners to
lay out the road, the valuation of private property by assessors ap-
pointed by the county judge, and for commissioners to investigate
the conditions of the road. All of these were to be paid by the
company at specified rates.
4 New York Statutes, 1800, Chap. 79.
6 New York Statutes, 1807, Chap. 38.
* The People vs Ithaca Insurance Company, 15 Johnson, 382.
1 This case was not reported. It was tried in the October term,
1817.
8 New York Statutes, 1813, Chap. 52.
4 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
THE TREATMENT OF CORPORATIONS BEFORE l88o.
The general tax law of 1823 contained provisions
which dealt specifically with the taxation of corporations.
All incorporated companies receiving a regular income
from the employment of capital were defined as "persons"
within the meaning of the act, and were to be assessed
and taxed in the same manner as individuals. The sec-
retary or treasurer of the company was to deliver to the
assessor in the town or ward where the office or place
for transacting the business was located, a list showing
the real estate occupied by the company, the amount of
capital actually paid in or secured to be paid in, except
the amount invested in real estate, and the amount of
stock held by the state or any charitable or literary institu-
tion. The proper officer of the company was to pay the tax,
and deduct it from the dividends of stockholders in pro-
portion to the amount of stock held by each. No deduction
was to be made in case of stock held by literary or charit-
able institutions. The tax might be commuted into an in-
come tax, if the company so desired, by a direct payment
into the county treasury of ten per cent of all dividends,
profits or income, in lieu of any tax levied upon the prop-
erty.
The funds received from the corporation tax were to
be distributed through the state treasury. The total re-
ceipts were paid over to the state, the state tax was then
deducted, and the remainder was credited to the counties
in proportion to the aggregate amount of stock held or
owned by stockholders residing in them. To enable the
state treasurer to make the proper apportionment, the
proper officer of every corporation liable to taxation was
required to furnish annually to the state treasurer a list
of the names of the stockholders in the company, their
places of residence, and the amount of stock held by them.
The state treasurer then sent to each county a list of its
stockholders, places of residence, the amount of stock
held by each, together with the amount of tax accredited
to the county. Provision was further made for the clistri-
9 New York Statutes, 1823, Chap. 262.
DEVELOPMENT OF GENERAL PROPERTY TAX 5
bution of the money to the several cities and towns in
proportion to the aggregate amount of stock held therein.
The purpose of the law, it stated, was to achieve the re-
sult that would have been reached had the stockholders
been originally assessed on their holdings at the place
where they lived.
This first statute was fought in the courts from var-
ious angles. Some of the decisions narrowed its applica-
tion, and others led to supplementary legislation. The
question whether this law superseded all prior statutes
was one of the first to be settled. In 1817 a law had been
passed to encourage manufacturing in the state which ex-
empted from taxation the buildings, machinery and
manufactured products in the hands of manufacturers
of cotton, woolen or linen goods. 10 In 1827 the property
of the Columbia Manufacturing Company was sold for
taxes. Action was brought in the courts on the basis of
the law of 1817. In its decision the court held that the
law of 1823 was a revision of all taxation laws and super-
seded all previous legislation. 11
This decision made the law of 1823 the basis for future
legislation. As interpreted by the court it was to be ap-
plied to all corporations without exception. Evidently it
began to work hardship upon roads or at least to curtail
their extension, for in 1825 exceptions were made in some
particular cases. 12 If the net income or profits of turnpike,
bridge, canal or manufacturing companies did not exceed
five per cent on their capital stock they might commute
their property taxes by paying five per cent of all profits
or income directly to the county treasury. The legisla-
ture in 1827-28 made some slight changes, the most im-
portant being a provision that if any incorporated com-
pany could show to the satisfaction of the board of sup-
ervisors that the company had been in receipt of no profit
or income, it should be stricken from the assessment roll,
and no tax imposed. 13 Turnpike, bridge, and canal com-
10 New York Statutes, 1817, Chap. 64.
U 4 Cowen, 556.
11 New York Statutes, 1825, Chap. 254.
M New York Statutes 1827, Chap. 9, and revised Chap. 13, title 4,
sects 11 and 12.
6 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
panics were treated more leniently than before in that if
their net annual income did not exceed five per cent on
capital* stock, they were exempt from taxation. Marine
insurance companies were added to the list with commu-
tation privileges. The law of 1823 had made no attempt
to classify corporations, but in these modifications we
have a distinct recognition of the principles of classifica-
tion. In other respects the law remained unchanged for
a number of years.
The commutation provisions in the above laws are in-
teresting in the light of present income taxation discus-
sion. They might easily be taken to indicate that the
legislature viewed the property tax as a tax on ability to
pay. It appears that it was viewed as a sort of income
tax, and where it obviously failed to function as such a
tax, it was modified. We shall see a little later, however,
that the courts disclaimed any such intention on the part
of the legislature.
The laws had not yet established a hard and fast view
of the legal nature of a corporation. This led to some
interesting developments in both case and statute law.
The bank of Ontario had been chartered in 1815 and was
taxed under the general law of i8i3, 14 until the law of
1823 was enacted. In the early thirties the village of
Ontario placed an assessment against the bank. It enter-
ed a demurrer on the ground that it was neither an in-
habitant nor freeholder, and only such could be assessed.
The Supreme Court held that the term "inhabitant" in-
cluded corporation, and that the assessment was valid. 15
For purposes of taxation, then, a corporation was a per-
son and an inhabitant. But there were problems still un-
solved.
The bank of Ithaca had been notified by one King, the
road supervisor, to appear at eight o'clock on a certain
morning to work forty-nine days on the highways. The
bank did not appear, either in person or by substitutes.
14 New York Statutes, 1813, Chap. 52. This stated, as in previous
laws, that shares were to be assessed in the hands of the stockhold-
ers.
15 Ontario Bank vs Burnell, 10 Wendell, 186.
DEVELOPMENT OF GENERAL PROPERTY TAX 7
nor did it proffer a commutation payment. A justice
fined the bank forty-nine dollars whereupon the bank car-
ried the case to the Supreme Court which decided in its
favor. 16 A corporation, the court held, has no corporeal
body; it has no material existence; it is incapable of per-
forming labor and cannot be compelled to perform an
impossibility. Hence it was not liable to assessment to
work on a highway. When the peformance of labor is
required, then, a corporation loses its personality. But
the legislature took a hand in the matter by enacting, in
1837, a statute which was very likely inspired by this de-
cision. 17 It provided that the commissioner of highways,
after assessing at least one day's work on each male in-
habitant above twenty-one years of age, "Shall include
among the inhabitants of each such town, among whom
such residue is to be apportioned, all moneyed or stock
corporations which shall appear on the last assessment
roll of their town to have been assessed therein." The
corporation was to be notified of the amount of labor as-
sessed against it by a written notice to its officers, and
any number of days' work not exceeding fifty ccaild 1;e
required in any one day. The same provision was made
for commutation as was made for individuals. Corpor-
ations were thus re-established as persons, even for work-
ing on the highways.
Other questions soon came before the court?. What
for example, was the precise meaning of the provision
that a company would not be taxed if it could show that
it had received no profit or income ? Were profit and in-
come synonymous terms, or did the law intend to disting-
uish between them? If they were merely two terms for
one thing, then net income must have been intended.
Some companies held to this view, and refused to
pay a tax because they had no clear income. Some
assessors ,on the other hand, took it that gross in-
come was meant. These difficulties of course led to liti-
gation.
As representatve cases we shall note those of the Com-
"Bank of Ithaca vs King, 12 Wendell, 390.
17 New York Statutes, 1837, Chap. 431.
DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ruercial Insurance Company, 18 and one involving two
Niagara banks and a railroad company. 19 In the first
case the company asked to be stricken from the assess-
ment roll since it had been in receipt of no property or in-
come, and because the value of its property during the
year had not equaled the stock paid in. The request was
refused, and a tax of $1320 was levied. The court held
that the tax must be paid, for the principle had never been
advanced that the taxation of property depended upon
whether it was profitably used or not. No such distinc-
tion was made in taxing the property of individuals in
fact to make it, would be to tax the skill and industry
used in employing capital instead of taxing capital itself.
The court quoted a letter written by the Comptroller to
the assessor in 1826 in which the same view was taken.
The point at issue in the other cases was similar. One
of the banks, because of depreciation of state stock and
other causes, had suffered a loss to an amount exceeding
its whole income or profits. The other bank's condition
was practically the same. The railroad company had
devoted all receipts to necessary expenses, repairs, and
improvements, so it had no profits or income beyond what
had been thus absorbed. As in the other case the court
decided that these assessments stand. An individual was
taxed on the value of his estate, even though it be so
managed as to prove a charge upon him instead of a source
of profits. Since railroads were to be assessed and taxed,
not as operating units but as separate parcels of property
in the different towns through which they passed, the
court held that this part of the law did not apply to rail-
roads which would be subject to tax even though no
profits or income had been received. The personal
nature of corporations was emphasized, and the general
property tax was rigorously applied.
In the case of banks it might easily have happened that
the original capital had been reduced through losses.
Were banks in such cases to be assessed on the amount
of capital paid in, or secured to be paid in, or only upon
18 People vs Supervisors of New York, 18 Wendell, 605.
19 People vs Supervisors, 4 Hill, 20.
DEVELOPMENT OF GENERAL PROPERTY TAX 9
the amount left after losses were deducted? Could sur-
plus and individual profits be assessed and taxed as prop-
erty ? Both of these questions came before the courts for
settlement. In the case of the Farmers' Loan and Trust
Company 20 losses had reduced a capital of $200,000 to
$104,000. The bank was assessed upon the original amount
and refused to pay. The court, after a lengthy discus-
sion, held that a corporation should be assessed upon the
whole nominal amount of capital paid in, or secured to be
paid in, and that no deduction was to be made for losses
of capital, or for debts. It further held that no deduction
could be made for that part of the capital which might
be invested in the stock of other corporations liable to
taxation. This was afterward recognized by the legisla-
ture to be double taxation, and the law was amended ac-
cordingly. The Attorney General, in 1832, had held that
since individuals were permitted to deduct debts from
their personal property assessments, inter-corporate hold-
ings should not be subject to double taxation. 21
The Bank of Utica had been taxed on $70,000 surplus,
which was described on the assessment roll as "other per-
sonal property or surplus." The court 22 reversed the ac-
tion of the assessors. A corporation could not be taxed
on surplus profits remaining on hand and undivided. The
capital stock, after deducting the value of the real estate,
was the basis for taxation. Taxing surplus would amount
to taxing the actual rather than the nominal value of the
stock, and this the legislature did not intend. This de-
cision, however, was not a final settlement of the matter.
It opened the way for evasions of various sorts, and the
problem continued to occupy the attention of the legisla-
ture and the courts.
We have seen that no deductions for taxes were to be
made from dividends on stock owned by the state ,or a
charitable or literary institution. It appeared, however,
20 Farmers' Loan and Trust Company vs Mayor of City of New
York. 7 Hill, 261.
"Report of Attorney General, Senate Documents, 1832, Vol. 2,
No. 103.
n Bank of Utica vs City of Utica, 4 Paige, 399.
10 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
that this provision worked to the advantage of the cor-
poration while it was of little benefit to the state or charit-
able institution which might own its stock. A statute was
accordingly enacted in 1845 which required the corpora-
tion to add to the dividend paid on tax exempt stock, a
sum equal to the taxes paid on the same amount of stock
not exempt from taxation. 23 Thus the total tax burden
upon the corporation was not decreased, but part went to
the favored stockholders.
These were the principal ways in which the law of 1823
was developed and modified by the courts and the legisla-
ture. The method of taxing corporations thus established
remained until 1853. Corporations were no longer look-
ed upon, as in the law of 1813, as an actual group of nat-
ural persons, but as an abstract, immaterial thing, created
by law, and deriving its powers from the law.
The growth of corporations had made them of increas-
ing importance as property-owning factors, and hence as
objects of taxation. The expenditures of the state, howev-
er were rapidly becoming greater than the revenues. 24 In
the Comptroller's report of 1849 tne legislature was urg-
ed to observe the most rigid economy in making appro-
priations. Rather than burden the people with more tax-
es, he wished to retrench all unnecessary expenditures. 25
Expenditures, however, continued to grow and more rev-
enue had to be secured. One way to obtain the needed
funds was to put a heavier tax burden upon corporations.
This is at least a partial explanation of the important
statute of 1853, amending the general tax law. The de-
sire to introduce a larger measure of system and uniform-
ity into the corporation tax seems to have been another
factor.
In the first place, by the law of i853, 26 the total exemp-
tion of that portion of capital represented by surplus or
28 New York Statutes, 1845, Chap. 195.
"The tax collected from corporations in 1843 was $381,372.89.
Annual report of State Comptroller, Assembly Documents, 1844,
Vol. 3, No. 98.
25 Annual Report New York State Comptroller, 1839, p. 4.
29 New York Statutes, 1853, Chap. 654.
DEVELOPMENT OF GENERAL PROPERTY TAX 1 1
undivided profits was done away with. It provided that
the assessment roll should contain not only the amount of
capital stock and the amount invested in real estate; but
also the amount of all surplus profits or reserve funds ex-
ceeding ten per cent of the amount of capital stock left
after deducting for real estate and for the amount of stock
owned by the state or charitable institutions. In the sec-
ond place, the provision for the commutation of the prop-
erty tax into an income tax, which had already been
granted to turnpike, bridge, and marine insurance com-
panies, was made general. If any corporation had not
received net annual profits or clear income equal to five
per cent of the capital stock, after deducting the assessed
value of the real estate, it could exempt itself from the
capital stock tax by paying, directly to the treasurer of
the county where the business was conducted, five per cent
of such net profits or income as it did receive, together
with the taxes levied on its real estate. The law further
stated that the capital stock of every company liable to
taxation, except as exempted, together with its surplus
profits or reserve funds exceeding- ten per cent of the
capital (less the real estate value) together with the real
estate should be assessed and taxed in the same manner
as the personal and real estate in the county. This latter
provision, as modified in 1857, remains the fundamental
part of the system of corporate taxation for local pur-
poses. Corporations are taxed locally on their real estate,
and upon their capital stock as here provided.
This law, it is important to note, introduced a uniform
taxing system applying to all corporations. But new ex-
emptions were made almost at once. From the first,
roads and turnpike companies had been especially favored
by the law makers. Because of competition from other
routes of travel, this was a particularly bad period for
turnpike companies, and in 1854 special legislation was
enacted in their behalf. 27 Toll houses, fixtures, and all
property were exempted from assessment or taxation un-
til the net annual income over and above all expenses of
repairs and collection of tolls exceeded five per cent on
" New York Statutes, 1854, Chap. 87.
12 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the original cost of the road. In the next year 28 the net
annual income allowed before taxes could be imposed was
raised to seven per cent, while the accumulation of a
"suitable reserve fund" was allowed as part of the ex-
penses which might be counted against income. The
loopholes in such legislation are apparent, and it is not
surprising that revenue from these sources was small.
Morever, the laws did not provide for the systematic col-
lection of taxes, or for any definite way of dealing with
companies which refused to pay them. Each county
handled the situation in its own way and much revenue
was lost to the state. Many corporations went into in-
solvency before their unpaid taxes had been collected.
Successive State Comptrollers asked that the laws be
simplified, that more explicit directions be given to as-
sessors, and that it be made the duty of county treasur-
ers immediately to prosecute corporations which were in
arrears. 29
As long as commutation of taxes was permitted only
to highways and insurance companies there was little
complaint, but as soon as it was made general the evils
of the system became apparent. This matter seems to
have had a larger importance than has sometimes been
attached to it. 30 State Comptrollers and various com-
mittees condemned the commutation provision and asked
for a change. 31 It is obvious that commutation was in-
sistent with the principles of the general property tax.
The purpose was to tax corporations like individuals, but
no similar privileges were granted to individuals. There
may be proper reasons for putting corporations under a
28 New York Statutes, 1855, Chap. 546.
"The Comptroller's report for 1854 (Assembly Documents, 1855,
Vol. 1, No. 4) was especially urgent along these lines. The reports
for several succeeding years ask for the same relief.
80 Professor Seligman (Essays in Taxation, New York, 1913, p.
147) says that it seems few corporations ever availed themselves of
this doubtful privilege of commutation, and accordingly in 1857
the law was changed.
"The report of the Finance Committee (Senate Documents, 1857,
Vol. 2 No. 55) and the Comptroller's repot (Assembly Documents,
1857, Vol. 1. No. 7.) were particularly bitter against the commuta-
tion provisions.
DEVELOPMENT OF GENERAL PROPERTY TAX 13
special rule as regards taxation yet the lack of profits is
hardly a sound basis of discrimination in favor of this
form of business organization.
Not only was the law defective in principle, but it gave
opportunity for fraud. Commutation and exemption
were secured in violation of the intent and spirit of the
law. Affidavits accompanying application for exemp-
tion were artfully worded so that some companies which
realized an income of more than five per cent, perhaps
double this, escaped or nearly escaped taxation. Loss
and expense were words which were juggled with to cov-
er up actual earnings. Expense often included money-
spent for fixtures, property, and other permanent im-
provements not properly chargable to annual operating
expenses. A heavier tax burden was thus shifted to in-
dividual tax payers. Such were the conditions painted
by those who recommended a revision of the law. The
change was accomplished in i857- 32 Besides abolishing
the commutation privilege the law permitted the amount
of stock owned in another corporation subject to the tax
to be deducted from the amount of capital stock put upon
the assessment roll. This provision attempted to eliminate
the double taxation formerly inherent in the operation
of the law.
But this law as revised was anything but definite, and
consequently caused much litigation. What was meant
by actual value of the stock ? When was there a surplus ?
Was stock invested in United States securities exempt
from taxation ? Was property temporarily outside the
state subject to assessment? These and many other ques-
tions were left to the courts for interpretation.
But a few of the representative cases can be noted. The
Oswego Starch Factory sought to decrease its taxes by
distributing all earnings to the shareholders, so that no
profits or surplus remained. A fifteen per cent dividend
had been declared, consequently the stock had been as-
sessed at seventy-five per cent above par. The company
carried the matter to the Supreme Court, and then to the
Court of Appeals. The Court of Appeals affirmed the
" New York Statutes, 1857. Chap. 456.
14 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
action of the lower court by holding that for the purpose
of taxing corporations under the law of 1857, stock was
to be assessed at actual value, whether above or below
the nominal par value, and this irrespective of the exist-
ence of surplus capital or reserve. 33
Some corporations refused to pay taxes upon that part
of their capital stock which they had invested in United
States securities, on the ground that the constitution for-
bids the taxation of the federal debt. The courts, in dif-
ferent cases, 34 took the opposite view. The state assess-
ment was, they held, not in form merely, but in fact and
principle, upon the capital stock of the corporation and
not upon the property in which the money paid in for
that capital was invested. There could be no objection
to the state's taxing capital invested in United States se-
curities as long as there was no unfriendly discrimina-
tion against the United States as a borrower, and as long
as the property in stock of corporations holding United
States bonds was subjected to no greater burdens than
property in general.
Steamship companies attempted to gain exemption on
capital invested in ships which either were being con-
structed or were registered outside the state. This made
it necessary for the courts to decide what effect the situs
of the property of a corporation had on its liability to
taxation. In tw r o cases, one decided by the Supreme
Court, 35 and the other by the Court of Appeals, 36 the
status of such property was determined. The property of
a corporation need not be physically within the state to be
taxable ; if legal situs and ownership be so situated it is
taxable. The only provision for taxing corporations was
to assess the capital stock at actual value without regard
to the kind or situs of the property in which it was in-
vested.
83 Oswego Starch Factory vs Dolloway, 21 N. Y., 499.
"Bank of Commonwealth vs Commissioners of Taxes and As-
sessments, 32 Barbour, 509 and 23 N. Y., 192 give in detail the at-
titude of the courts on this point. For cases relating to it in the
United States Supreme Court see Chapter VI. p. 97.
" People vs Commissioner of Taxes, 3 Thompson and Cook, 678.
M Pacific Mail Steampship Company vs Commissioner of Taxes,
64 N. Y, 541.
DEVELOPMENT OF GENERAL PROPERTY TAX 15
Such, then, was the law by which corporations were to
be taxed for the next several years. No longer were cor-
porations looked upon as public benefactors, deserving
special encouragement and more lenient treatment than
natural persons, but all were taxed alike under practically
the same rule. 37 The same assessors and the same meth-
ods of assessment served for the man with the small farm
worth $1000 and for the corporation worth $1,000,000.
As yet, however, neither legislators nor judges had held
that the corporate form gave any special advantage for
which remuneration should be made, nor was it argued
that under uniform legislation in taxation ,the corpora-
tions might have advantages that did not accrue to in-
dividuals.
This system of "uniform treatment" was not however,
entirely satisfactory. In practically every successive an-
nual report of Comptrollers, reform measures were pro-
posed to the legislature. One of the first evils to be em-
phasized was the perennial lack of uniformity in local as-
sessment methods a fault which was brought into glar-
ing relief by the differences in the assessment of similar
corporations. Local assessors had to appraise the real
estate and the "personalty" of even the largest corpora-
tions. True values were easily covered up, and in any
case the assessor rarely was competent to value corporate
property correctly. In some districts the corporations
were assessed and taxed to the full value of capital and
surplus, while in others the assessment was as low as
twenty-five per cent of the actual value. This evil was
an inevitable part of the system.
The use of different systems of equalizing valuations
led to further injustice. Not only did special districts
take advantage of the law for their own good, but corpor-
ations often designated as the place of the principal office,
where the assesments were to be made, some district
where the corporation was unknown to the assessor, or
where the actual plant was so far away that the assessor
had no way of getting at real values. Such were the
87 Some concessions, however, continued to be made to banks and
insurance companies.
16 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
evils which the Comptrollers continued to emphasize and
for which they asked legislative remedies.
The remedies proposed were for the most part mere
palliatives. No Comptroller even hinted at the possibil-
ity of radical change in the law, of the abandonment of
the attempt to apply the general property tax in its crude
form to corporations. It was urged that returns should
be subjected to the inspection and decision of one person.
This would insure uniformity in the mode of determin-
ing valuations as well as more reliable data than could
be had by local assessors without access to reliable sourc-
es of information. The central valuations, it was pro-
posed, could be sent to the counties, and then put upon
the district assessment rolls. The listing system was also
proposed, by which every taxpayer was to furnish to the
assessor, under oath, a detailed statement of all his prop-
erty liable to taxation together with its value. This sys-
tem was used in several of the western states, and, it
was alleged, with success. In order to secure uniform-
ity in the assessment of real estate, it was considered ad-
visable to have state assessors visit every town and ward
in the state, and ascertain from personal observation and
investigation, the true and actual value of all real estate.
These valuations were to be turned over to a state board
of equalization, and their returns distributed to the coun-
ties by the comptroller. This would insure that a large
amount of real estate which had escaped taxation would
be placed upon the rolls, and would also give a more
equal valuation than would the old haphazard way.
It was not until 1870 that the legislature took any ac-
tion. Provision was made, in that year, for a special tax
commission, to report in 1871. An exhaustive review of
the system of taxation was given by the commission, its
evils were pointed out, and remedies were suggested. 38 It
emphasized the tax dodging resulting from the exemp-
"The report of this commission is given in Assembly Docu-
ments, 1871, Vol. 3, No. 39. The commissioners were David A.
Wells, Edwin Dodge and George W. Cuyler. This report has be-
come famous, and is by far the best treatment of the New York
tax system that we have. A second report was made in 1872 (Sen-
ate Documents, 1872, Vol. 2, No. 26.)
DEVELOPMENT OF GENERAL PROPERTY TAX 1 7
tion of federal securities, and even went so far as to say
that from the standpoint of taxable resources it was a
fortunate matter that so many of these secureties hal fal-
len into the hands of foreigners. United States bonds
were often used as collateral upon which to borrow mon-
ey. One who had $100,000 in bonds might borrow $100,-
ooo and invest it in business. When assessed, the return
would be $100,000 business capital, $100,000 just debts
and liabilities, no personal property subject to taxation.
For example, the fire insurance companies of New York
City, with a capital of about $24,000,000, and an estimat-
ed surplus of $11,000,000, making a total of $35,000,000,
were assessed in 1870 on a personal property valuation of
$9,240,965 and a real estate valuation of $3,000,000.
The suggestion made aimed largely at a more uniform ap-
plication of the general property tax to the corporate form
of industry. The commission aclvocated,however, a special
tax upon corporations which enjoyed monoply priveleges,
and cited several instances of such conditions. In spite of
the thoroughness of the work and the vividness with
which evils were portrayed, the recommendations failed
to bring about any reform. Reasons for this, which no
doubt may be considered largely true, were given by the
New York Times. It said editorilly: "The commission
appointed in 1870 was barren of practical results, partly,
we suspect, because the changes suggested involved some-
thing like thoroughness in the work. Local opinion was
not ripe for them and local politicians were unwilling to
undertake the task of educating their constituants up to
the mark at which comprehensive legislation might be
possible." 39
It was not until 1876 that the legislature was again
moved to the point of taking further action. In that year
the Assembly adopted a resolution 40 to the effect that a
commission be appointed to prepare a bill relating to as-
sessment and taxes to be presented to the next legislature.
The resolution suggested certain reform measures to be
incorporated in the bill. One of these was that corpora-
"New York Times, April 15, 1879.
40 Assembly Documents, 1876, Vol. 6, No. 105.
18 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
tions and joint stock companies should be assessed and
taxed by state assessors. The assessment should be based
upon a percentage of gross receipts, upon the value of
snares in proportion to dividends, or in any other manner
that seemed just and equitable. The rate was to be grad-
uated according to investments in real estate while no de-
duction was to be made for such investments. It was
further suggested that manufacuring companies be as-
sessed at a low figure, that real estate continue to be as-
sessed where located, and that all corporation taxes ex-
cept on real estate be paid directly to the state
treasury. Here were suggestions for real reform,
and at least a hint of the possibility of using some method
other than the general property tax. But nothing result-
ed from the resolution, and the Comptrollers continued to
inveigh against the then existing methods of taxation.
The reports of Comptrollers from 1875 to I ^ are prac-
tically unanimous in their condemnation of the evils
which existed. Because of the high rate of taxation in
some places, the employment of capital had become un-
remunerative. A continuance of such a policy spelled
ruin. As a whole, however, the personal property of cor-
porations was very much underassessed. The assessment
of real estate, it was pointed out, might approximate its
real value, because it forced itself upon the notice of the
assessors, but personal property could escape because it
was so easily concealed or moved. To prove the conten-
tion, figures were cited to show that the assessed value of
personal property had actually declined from year to
year. 41
In their report for i8y6 42 the State Assessors asserted
that the assessment of the stock of incorporated compan-
ies, as generally practiced, was no more than a mockery.
The working of the law, in their opinion, had reached
a point from which a new departure was dispensable. In
their report for i878 43 they expressed a surprise and in-
41 Annual Report of New York State Comptroller, 1879.
42 Annual Report of New York State Assessors, Senate Docu-
ments, 1879, Vol. 2, No. 28.
41 Annual Report of New York State Assessors, State Documents,
1879, Vol. 2, No. 28.
DEVELOPMENT OF GENERAL PROPERTY TAX 19
dignation that legislators into whose hands great trusts
had been committed, and who were supposed to guard
the welfare of the people, could longer refuse to grapple
with the tax laws and either amend them so as to make
them uniform in their purposes and operation, or change
the system so as to confer the greatest good upon the
greatest number. They even advocated the collection of
all state taxes (except what would be necessary for the
state capitol then in construction and in which the people
would want to have a share) from domestic and foreign
corporations doing business in the state. This latter sug-
gestion is closely akin to the present much discussed re-
form of separation of state and local revenues. But it
seemed impossible to impress the urgent importance of
tax reform upon the minds of the legislators.
In 1879 the legislature seems to have been somewhat
aroused from its lethargic attitude but no positive accom-
plishment was reached. As expressed editorially in the
New York Times, the legislature merely "showed a dis-
position to do something." 44 Beginning with 1879 the
newspapers of the state began to give more attention to
taxation matters. The Times showed how corporations
were evading taxation by investing capital in nontaxable
secureties, by locating the principal office in districts of
low taxation, and by other devices. 45 It was claimed that
for years the influence of railroads and other corporations
had been powerful enough to defeat all efforts to compel
them to bear their just proportion of public burdens. The
legislature, throughout the session, was criticized because
of inactivity, and because of its apparent unwillingness
to do anything with the tax situation. Just before ad-
journment the Times said editorially : 46 "The point has
been reached at which shado\vy indications of a willing-
ness to correct the flagrant evils of the present system of
taxation and to substitute for it a system at once equitable
and productive, will no longer suffice. Year after year
the evils have been heard off, the demands now is for
44 New York Times, April 21, 1879.
48 New York Times, January 16, 1879.
*New York Times, April, 21, 1879.
20 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
effective remedies. It is admitted that these cannot be
hoped for this year and it is all but certain that for the
clumsy expedients now before the legislature there is no
chance. All that members who honestly desire reform
recognize at the moment possible is some indecisive ac-
tion or some general expression of opinion that shall seem
to strengthen the likelihood of obtaining legislation next
year." This well expressed the situation: an aroused
public demanding reform, the hostile attitude of state
officials to the existing system, and the partial awakening
of the legislature to the need of reform.
Under these circumstances, the legislature could not
well resist much longer. Among the first things it did
in 1880 was to attack the tax situation. A joint com-
mittee was chosen to revise the tax law. Through the
efforts of this committee ,the pressure brought to bear by
the public, and through the interest of certain individual
law makers, a new tax law was finally passed. This law
is the basis of the present general system of taxing cor-
porations for state purposes.
CHAPTER II.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS
The present annual franchise tax upon corporations
is based on the statute enacted June 30, iSSo, 1 It intro-
duced the indirect system of taxation for state purposes
which has since been largely followed. No change, how-
ever, was made in the method of taxation for local pur-
poses.
Under this law every corporation was required to re
port annually to the State Comptroller, the amount of cap-
ital stock paid in, and rate per cent of every dividend de-
clared during the preceding year. If there should be no
dividend, or should the dividend be less than six per
cent, on the par value of the stock, the company was to
furnish an estimate of the actual value of the capital
stock. This value must not be less than the average price
at which the shares had sold during the preceding year.
If the comptroller was dissatisfied with the report he was
empowered to make a revaluation. Penalties for neglect
to make reports where provided while two successive fail-
ures furnished ground for proceeding to forfeit the cor-
poration charter. 2
The law further noted the exceptions and formulated
the rule by which taxes were to be computed. Banks,
savings banks, life insurance companies, foreign compan-
ies, and manufacturing companies did not come under the
provisions of the act. The tax was to be computed as
follows : If the dividends amounted to six per cent or
more upon the par value of the stock, the tax was to be
one-fourth of a mill for each per cent of dividend so made
1 New York Statutes, 1880, Chap. 542.
*The penalty for failure to furnish the required report was an
addition of ten per cent to the tax levied on the corporation for each
year the report was not furnished.
21
22 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
or declared. If there were no dividends, or if they were
less than six per cent, then the tax was to be one and one-
half mills per dollar on the valuation of the stock as pro-
vided for above. Should a part of the stock pay more
than six per cent, as preferred, this was to be taxed at the
one-fourth mill rate, while the rest, if its dividends were
less than six per cent, was to be taxed at the other valua-
tion.
The taxes collected under this law were to be used for
the ordinary expenses of the state. In 1881, 3 to meet
constitutional difficulties, the new tax was defined as a
tax upon the corporate franchise or business of such or-
ganizations as came under the law. In 1882* the powers
of the Comptroller were extended. If he were dissatis-
fied with the report of a company only a part of whose
capital was employed in the state, he could determine the
amount of capital which should be taken as the basis of
the tax. If the corporation were dissatisfied it could ap-
peal to a board composed of the Secretary of State, the
State Treasurer and the Attorney General, the decision
of which was to be final. Broader powers were also given
to the Comptroller in dealing with corporations which
were delinquent in making reports. 5
This was the first tax reform dealing with corporations
in a quarter of a century, and a period, too, marked by
the expansion and development of large scale business,
and the corporate form of organization. 6 Yet the re-
forms met with much criticism. The press, of which the
the New York Times will again be taken as representa-
tive, was anything but favorable. It characterized the
whole result of the arduous and well-meant labors of the
'New York Statutes, 1881, Chap. 151.
4 New York Statutes, 1882, Chap. 151.
The Comptroller was given power to examine the books and
records of the company and to fix the amount of the tax. If the
company failed to pay the tax and expense of examination within
thirty days they could be sued. Witnesses and officers might be
subpoenaed and examined under oath. Should they fail to appear
they were guilty of contempt.
'The provisions for taxing the corporations exempted from the
action of this law will be given in the chapters dealing with such
organizations.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 23
joint committee as "an incongruous patch work", and said
that the tax laws remained as much as ever in need of
systematic and judicious revision. 7 It prophesied that
the "short-sighted bungling of the last legislature" would
give the courts more to do than the tax collectors. 8 The
difficulty most emphasized was adjusting the annual fran-
chise assessment to the assessment which had just been
completed. This difficulty, of course, could be, at most,
only temporary. Even the Governor had some misgiv-
ings for he is quoted as having said. in a memorandum
tiled with his approval of the act that "for want of per-
fect and comprehensive provisions it [the act] may fail
to accomplish all that it was evidently intended to do." 9
He did not deem the objections of sufficient importance to
warrant the withholding of his approval from the law,
but the defects, he thought, should be remedied by the
next legislature.
Much difficulty was experienced in attempting to ap-
ply the new law. The experiment, however, though im-
perfectly tried, had demonstrated the possibility of re-
lieving the burden put upon real estate by the use of such
a tax for state purposes. What was now needed was to
make the law more serviceable. Suggestions to accom-
plish this were made to the legislature in 1881, but it could
be induced to make no changes in the tax reform of the
previous year.
The attitude of the Comptroller and State Assessors
to the law was on the whole favorable, although they
did not consider it free from objections. In the first
Comptroller's report following the passage of the act, it
was shown that the new law followed, in part, the Penn-
sylvania system, but that, as always must be the case when
only a part of a complete system is adopted, the result
could not be entirely satisfactory. 10 The report further
7 New York Times, Editorial, May 29, 1880.
8 New York Times, Editorial, July 15, 1880.
9 New York Times, Editorial, July 31, 1880.
"Annual Report of New York State Comptroller, Assembly
Documents, 1881, Vol. 1, No. 3. The Comptroller had been one of the
Commission appointed to investigate the Pennsylvania system and
had worked energetically to have it adopted by the legislature.
24 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
showed that the Pennsylvania system was practically a
separation of state and local revenues. This method was
not well understood by the legislature, neither did they
give it careful study, and it was defeated because of the
radical character of the innovations it would have intro-
duced. While he considered the attempt of the legisla-
ture an improvement, yet the Comptroller asked that a
committee be appointed to work out a system more like
that of Pennsylvania. Such, he thought, would not only
work admirably in New York, but would simplify the
problems of corporation taxation.
The report of the State Assessors was somewhat more
optimistic, although they too saw serious difficulties in the
way of the operaton of the new law. It was, they thought,
a step in the right direction, and with the proper amend-
ments would amount to a very substantial improvement.
If the personal property of corporations as well as of in-
dividuals could be made to bear a fair and equitable share
of the public burdens, the taxation problem would be in
large measure settled. They attributed the corporate in-
fluence to prevent tax legislation to the fact that existing
inequalities would be perpetuated. Had the law been
drawn so that the method of assessment would have been
uniform and equitable, no just ground for complaint
would have existed. 11
In all this comment on the part of officials and of the
press, the principle set forth in the law of 1823 that cor-
porations are persons and should be taxed as such was
given most importance. The difficulties that had arisen
were bound up with the problem of valuing the property
of the larger interests so as to secure just and equal
treatment. But in the report of the State Assessors for
1 88 1 we see the dawning of some new and exceedingly
important ideas in respect to the general principles of cor-
porate taxation. The assessors begin to suspect that per-
haps something more than absolute equality in assessment
and taxation is required if exact justice is to be done.
After the personal property and real estate of a corpora -
11 Annual Report of New York State Assessors, Senate Documents,
1831, Vol. 1, No. 40.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 25
tion is fairly taxed with similar possessions of individuals,
there is yet in the corporate hands a peculiar species of
property, the corporate franchise. This is a privilege,
they contended, granted by the community as a whole
to the corporation, and varies in its character and in its
value; They pointed out three sources of franchise val-
ues : ( i ) the partial exemption of the owners of the cor-
poration from ordinary business risks by limitation of
liability; (2) the facility with which equities in corporate
property may be transferred; (3) the value arising, in
the case of some corporations, from their possessions and
use of public property. These values had long escaped
taxation and the new law was but a step in the right
direction. They contended that franchise values should
be justly and equitably assessed, and that such public
grants might justly bear a high rate of taxation. The only
limit to such taxation would be in a rate which would
substantially check corporate enterprise or drive it from
the state. Nothing in the present methods of taxation
had produced such an effect, since the use of the cor-
porate form of organization had steadily grown even in
states where the tax was heavier than in New York.
The assessors granted the law to be an improvement
over former methods yet suggested changes which would
secure more revenue and greater equity. The act was
criticized because it made no provision for taxing the
valuable privilege conferred in permittting a corporation
to be formed, and an organization tax was suggested as
a remedy. As a payment for this privilege a tax was
proposed of one mill per dollar on the capital stock of
every new corporation (with a minimum tax of $100).
It was estimated that this would yield $50,000 a year,
while it would be collected more cheaply and paid more
cheerfully than any other tax. It was also contended
that more substantial justice should be secured in classify-
ing the franchise values, especially among public service
corporations.
In spite of the defects the assessors were pleased with
what the law had accomplished since it had been in force.
They said : "Under the operation of these laws over
26 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
i, 000,000 have already been saved to the other tax
payers of the state. The prospect is pleasing for more
equal and less taxation. The last two years witnessed
a great advance toward a just and exact system of taxa-
tion. The burden on the shoulders of toil has been light-
ened while at the same time capital has not been denied
its rightful returns or enterprize deprived of its legiti-
mate reward. The state tax has been greatly reduced and
this too without hinderance or delay to the great works
of public consequence that have given and continue to
give New York State the lead in the procession of
states. 12
After the law really got into operation it seems to have
been more favorably looked upon than when it first came
from the hands of the makers. The lowest general tax
rate since 1856 w r as in 1882, and this was attributed to
the working of the new franchise tax on corporations. 13
It was thought that this low rate could be maintained and
that, with a few amendments to the law, in a few years
the entire expenses of the state government could be se-
cured without levying any state tax upon the counties. 14
The new law, gave rise of course, to a number of dis-
putes which the courts had to decide. The general result
of this litigation was to more firmly establish the law.
We shall note but a few decisions. The most important
case was that of The People vs The Home Insurance Com-
pany of New York. 1 * The insurance company contested
the constutionality of the law on two grounds. First,
because in a tax law the object of the tax must be definite-
ly stated ; it must be either a defined expenditure, a defin-
ed class of expenditures, or a defined fund for future
expenditures. The law, by making the tax for "the ordin-
nary and current expenses of the state," did not provide
for a definite object, and it was claimed that it was there-
12 Annual Report of New York State Assessors, Senate Docu-
ments, 1882, Vol. 5, No. 58.
11 Annual Report of New York State Comptroller, Assembly
Documents, 1882, Vol. 1, No. 3.
" Annual Report of New York State Comptroller, Assembly
Documents, 1882, Vol. 1. No. 3.
ir '92 N. Y., 328.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 27
fore unconstitutional. The second ground for object-
ion was that the tax impeded and burdened the action of
the United States government and was for this reason
invalid. Less important objections were that a general
tax on property of which United States bonds were a
part was in effect a tax on the bonds and therefore invalid,
and that the constitutional requirements of equality of
burden was violated.
The Court of Appeals upheld the law at every point.
As to the alleged abuse of a specified purpose, the court
said that "the system by which finances of the state are
classified and the purposes to which their money may be
applied are embodied in numerous acts of the legislature
creating various and distinct separate funds. Among
these is a so-called general fund recognized by the con-
stitution." Each of these funds, aside from the general
fund, had some special object, and payments could not be
made from it for any other purpose. Most of the current
expenses were paid from this general fund and it was
provided by the constitution that any appropriations made
by the legislature not specifically charged to designated
funds were to be paid out of it. A specification, therefore,
the court held, for the replenishment of this fund was a
sufficiently definite statement of the object of the tax.
To have held otherwise would have been in conflict with
precedent, for a law passed in 1855 levying a tax for the
general fund was held to have a sufficiently definite pur-
pose to meet the constitutional requirements. 16
The question whether it was constitutional to tax cap-
ital stock invested in United States bonds was also
answered affirmatively. The point upon which the decis-
ion hinged was whether the assessment was upon the
franchise, or whether it was upon the property of the
corporation. The court held that the assessment was up-
on the franchise and cited precedent where it had been
held lawful for legislative power to prescribe a rule of
value. 17 It could not be denied that a fair measure of
the value of franchises of corporations would be the prof -
18 People ex rel. Burrows vs Supervisors, 17 N. Y., 235.
" Monroe Savings Bank vs City of New York, 37 N. Y., 365.
28 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
its resulting from their use, and it could not be maintain-
ed that such a rule was unequal in its effect upon different
corporations or unjust in general operations. The tax
was to be a franchise tax and not a property tax ; it was
levied upon corporations alone, and one of the penalties
for non-payment was forfeiture of character. The tax
was levied upon business prosperity as evidenced by the
power to declare dividends and not upon the value of the
corporate property. Income was used merely as a meas-
ure of ability to pay.
This case was finally carried to the United States Su-
preme Court which held, as did the state court, that the
authorities were not required to deduct the amount of
stock which the company held in United States bonds and
compute taxes only upon dividends derived from the re-
mainder. 18 Double taxation was not upheld as a valid
complaint against the law. It w r as decided that the legis-
lature may, at its discretion, impose unequal or double
taxes, and in determining a question of legislative power
the courts were precluded from interfering. 19
Most of the cases which arose were in regard to the
application of the law in particular cases rather than at-
tacks upon its constutionality. So far as broad questions
of principle were concerned, subsequent decision followed
the findings in the Home Insurance Company case. Some
[articular assessments made under the law, however, were
declared illegal. The case of the Albany and Greenbush
Bridge Company is interesting because of the suggestion
made for determining the value of real estate for taxation
purposes. The board of assessors had made the assess-
1S People vs Home Insurance Company, 199 U. S., 129.
19 Some corporations, after paying the state tax sought to be freed
from local taxes. In the cases of Westchester Fire Insurance Com-
pany vs Davenport (25 Hun, 630) and Eastern Transportation Line
vs Commissioner of Taxes (26 Hun, 446) the court held that the
taxes under the law were for the exclusive benefit of the state, and
the act did not interfere with the power of local authorities to im-
pose further taxes for municipal or county purposes. In the case
of Western Fire Insurance Company vs Davenport (91 N. Y., 574)
the courts hold that the exemptions granted under the law were
only exemptions for the state taxes and did not affect the right to
tax for local purposes.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 29
ment at $280,000.00 and the company made application
to have it reduced to $i 10,000.00. The assessors refus-
ed to comply and the case was carried to the Supreme
Court which decided the reduction should be made. In
determining the value of real estate for taxation, it held,
the cost of acquiring such property may be considered,
yet a more controlling consideration is the earning capac-
ity. 20
Even though the new tax law was upheld in its entirety
by the courts 21 and the assessments made under it gene-
ally sustained, yet the system was not deemed perfect.
It is obvious that injustice resulted as long as the entire
capital of a foreign corporation doing business in the
state was subject to the tax. An act was passed, however,
in 1885 stipulating that the basis of taxation of foreign
corporations under the law was to be the amount of capi-
tal stock employed within the state. 22 Information on
this point was required in the report made by foreign
corporations, and the Comptroller was given power to
investigate and modify the stated amount. Few corpo-
rations made protracted objections to the law yet criti-
cisms arose because of the exemptions, evasions and large
amount of litigation. In 1885 the Comptroller, aided by
the Attorney General, submitted a bill to the legislature
the passage of which he though would minimize the diffi-
culties. 23
One of the objections to the existing tax system was
that the burden was unequally distributed between real
estate and personal property. In a lengthy special report
to the legislature in 1866 the Comptroller condemned the
unjust burden upon real estate. 24 He dwelt particularly
20 Albany and Greenbush Bridge Company vs Assessors, 34 Hun,
321.
21 In a letter to the Comptroller, December 18, 1883 (Annual Re-
port to State Comptroller, 1883, p. 110) the Attorney General said
that, in all of its essential features, the corporation law had been
sustained by the highest court in the state in a manner very satis-
factory to the officers who had its execution immediately in charge
the Comptroller and Attorney General.
22 New York Statutes, 1885 Chap. 501.
28 Senate Documents, 1885, Vol. 6, No. 49.
M Special Report New York State Comptroller, Assembly Docu-
ments, 1886, Vol. 8, No. 89.
30 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
upon the rate of taxation, and attributed the inequality to
fallacious assumptions under which corporations were
taxed. The assumption was, he claimed, that corporate
property was purchased solely by issues of stock and con-
versely that capital stock represented the entire value of
corporate possessions. He continued to show that the
capital stock represented by bonded indebtedness practi-
cally escaped taxation. This idea, however, does not con-
form to his justification for deducting the value of real
estate from the value of capital stock in computing the
annual franchise tax. This should be done to avoid
double taxation since a part of the capital stock was in-
vested in real estate. His idea, it seems, was that the tax
attempted to reach the otherwise untaxed personal equi-
ties in the corporation. Real estate was taxed directly
and the bond holders were (in theory) taxed on their
bonds. Only shares of stock were not taxed directly. Had
bond issues been considered as capital stock, as sug-
gested, the property would have been doubly taxed. A
system of taxing corporations on bonds based upon the
amount of interest paid was suggested and, according
to the Comptroller's interpretation of the law, very prop-
erly rejected.
We find the question of taxing indebtedness frequently
oiscussed in governors' messages and state officials' re-
ports. A special tax on bonds collected by the Comp-
troller ; a tax on the sales of securities ; the assessments
of corporations on the basis of net or gross earnings ;
the adoption of some uniform rule of valuation to be used
by local assessors regardless of ownership ; these schemes
all had their advocates. The Comptroller, in his report
for 1887, advocated a more effective tax upon indebted-
ness, and presented the draft of a bill to tax such securi-
ties one-fourth of a mill for every one per cent interest
paid. 25
All these protests and recommendations accomplished
* Annual Report of New York State Comptroller, Assembly
Documents, 1887, Vol. 1, No. 3. This proposal was quite similar
to present proposals for a millage tax. New York is now attempting
to handle the taxing of some securities through the secured debts
law (New York Statutes, 1911, Chap. 802).
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 31
no results at the time. The only legislation of importance
was a new organization tax adopted in i886. 26 There-
after every corporation, joint stock company, or associa-
tion incorporated by or under any general or special law
of the state, having capital stock divided into shares, was
to pay for state purposes a tax of one-eighth of one per
cent upon the amount of its authorized capital stock. A
like tax was to be paid upon future increases in capital-
ization, and no corporate powers could be granted or exer-
cised until the tax was paid. Corporations not for profit
were exempt from the tax.
The law was welcomed as a proper compensation for
the valuable privilege of exercising corporate powers.
The New York Times Said : "The bill imposing a tax of
one-eighth of one per cent upon capital stock of corpora-
tions hereafter formed, as compensation to the state for
the privilege of incorporation, provides for but a moder-
ate charge for the granting of corporate franchises. Ag-
gregated capital enjoys many advantages under our laws
and the direct return it makes is inadequate. The tax
would be no check upon legitimate enterprise and would
bear a small proportion to 'the advantage derived from
the privilege of aggregating capital by incorporation for
profitable purposes." 27
It was feared by some that the tax would check the
organization of corporations in the state which might
offset any advantages to be gained. The Comptroller, in
his report for 1886, did not find such fears justified. He
reported that, from the passage of the law on April 16
to September 30, $53,600.06 had been collected, and that
there had been no tendency to drive organizations from
the state. He considered the law wise and just, and
added if there were such enterprises that could not afford
to bear the burden, the state could well afford to lose
them. 28 As interpreted by the court an organization tax
must be paid in case of the consolidation of two corpora-
-' New York Statutes, 1886, Chap. 143.
27 New York Times, Editorial, March 10, 1886.
"Annual Report of New York State Comptroller, Assembly
Documents, 1887, Vol. 1, No. 3.
32 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
tions even though each had already paid such a tax. 29
Likewise a new corporaion formed under the reor-
ganization act must pay the organization tax. 30 In 1901
the organization tax was reduced to one-twentieth of one
per cent, to be in no case, however, less than one dollar. 31
By the law of I9o6 32 if a company decreased capital
and subsequently increased it, the tax must be paid only
upon the excess of new capital over what bore the first
tax. In consolidation any excess of capital over the com-
bined capital previously taxed must bear the organization
tax. Another statute enacted in 1889 gave the Comp-
troller power to adjust the claims of any company for
taxes illegally paid, and provided that such adjustment
might be reviewed by the Supreme Court. 33 This was
necessary because of a number of court decisions which
had declared that some taxes had been illegally assessed.
The slight modifications just noted did not satisfy those
interested in thoroughgoing tax reform. The receipts
from corporation taxes were falling off. This was due
partly to court decisions narrowing the scope of the law,
and partly because in preceding years items for enormous
taxes were allowed to be credited to future taxes. The
extension of exceptions ; rebates because of illegal assess-
ments ; the statute providing that only the portion of the
capital employed in the state was subject to tax ; and the
rebates and decline in revenue occasioned by the decision
of the Supreme Court making it illegal to tax interstate
commerce were factors in causing the revenue to fall
off, 34 while it was believed that corporations were leav-
ing the state. 35
20 New York Phonograph Company vs Rice, 57 Hun, 486.
30 People vs Cork, 110 N. Y., 443. This was changed by law in
1806. See text.
"New York Statutes, 1901, Chap. 448. This was changed to five
dollars in 1910 (Chap. 472.)
82 New York Statutes, 1906, Chap. 524.
3 New York Statutes, 1889, Chap. 463.
34 See Annual Report New York State Comptroller, 1889, p. 28.
For the last previous fiscal year the organization tax had fallen off
almost $20,000.
85 In testimony before the special commission in 1893, (Assembly
Documents, 1893, Vol. 13, No. 69) Mr. T. L. Feitner, a commission-
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 33
The annual franchise tax was often partially evaded
because dividends were made the basis for computing the
tax. It was reported that many companies were earning
profits of from five to fifty per cent, sometimes more, up-
on their capital, but distributed only a part in dividends,
turning the rest into surplus. In such cases the state
received nothing from the amount of earnings passed to
the surplus fund. It would have been more equitable, of
course, to have based the tax on the amount earned,
whether distributed or not, rather than upon dividends
declared. Comptrollers generally wished to relieve real
estate from the burden of state taxation, and pointed t<\
the disproportionate burden thrown upon this class of
property by the evasion which corporations were practic-
ing.
The courts, meanwhile, were frequently called upon to
interpret the law of 1880, as amended. The term "incor-
porated or organized under any law of this state" was to
include any combination of individuals which claimed
privileges not enjoyed by individuals or copartnerships. 36
The term "doing business in this state" had reference only
to foreign corporations. The tax was not upon property,
but upon franchise ; and domestic corporations were not
exempt from taxation upon the amount of business done
outside the state. 37 There was no limit to the time in
which a corporation might apply to the Comptroller for
revision of a tax levied against it, nor could the Compt-
roller refund any taxes illegally collected. Such refunds
could only be made through legislative appropriation. 38
er of taxes in New York City, expressed the opinion that it was
not alone the special taxes upon corporations which led them to
incorporate in other states. He thought the reports required caused
more publicity than they desired. He considered the system a good
one because it caused the home companies to be looked upon as
creditable while those going out of the state were considered more
or less fraudulent.
88 People vs Wemple, 117 N. Y., 136.
17 American Contracting and Dredging Company vs Wemple, 129
N. Y., 558.
18 In re Duffy, 133 N. Y., 152.
34 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
This difficulty was soon eliminated by legislative enact-
ment. 39
The tax law of 1881 was materially amended in i896 40
and again in I9o6. 41 The fundamental principle of an
annual franchise tax on capital stock was retained, but
attempts were made to formulate more distinct classifica-
tions. The law of 1881, as here amended, gives the sys-
tem by which the annual franchise tax is assessed upon
the capital stock of corporations.
Corporations subject to the annual franchise tax are
required to make yearly reports to the comptroller stat-
ing the amount of authorized capital stock, the amount of
stock paid in, the date and rate of each dividend declared,
the entire amount of capital and the amount of capital
employed in the state. The tax is to be paid in advance,
and is based upon the amount of capital stock employed
within the state during the preceding year. The capital
stock employed in the state is the same proportion of the
entire capital stock as assets within the state bear to the
entire assets.
The classificaion of capital stock for the purpose of as-
sessing the annual franchise tax is as follows : ( i ) If divi-
dends have amounted to six or more per cent upon the
par value of the stock, the tax rate is one-fourth of a mill
for each per cent of dividends made or declared. (2) If
dividends have been less than six per cent and (a) assets
do not exceed liabilities, exclusive of capital stock, or (b)
the average selling price of the stock during the year has
been below par, or (c) if no dividend was declared, then
the rate of tax is three fourths of a mill. (3) If dividends
have been less than six per cent and (a) assets exceed
liabilities, exclusive of capital stock, by an amount equal
to or greater than the par value of the stock or (b) if the
average selling price of the stock has been above par, the
tax rate is one and one-half mills, but the valuation of the
stock shall not be less than (a) par value; (b) difference
89 New York Statutes, 1889, Chap. 463 gives the Comptroller
power to make refunds.
40 New York Statutes, 1896, Chap. 908.
41 New York Statutes, 1906, Chap. 474.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 35
between assets and liabilities, exclusive of capital stock;
(c) average selling price of the stock during the year.
(4) If a part of the capital stock has paid more than six
per cent dividend while a part has paid no dividend or
less, the above rules are to be applied to each portion of
the stock as if it existed alone. (5) Corporations not
assessable by the above rules are to be taxed by an amount
not less than would be produced by an assessment of (a)
one and one-half mills on the actual value of the capital
stock, or (b) one and one-half mills on the average sell-
ing price during the year.
A number of corporations, however, are exempt from
the annual franchise tax on capital stock. These are
banks, savings banks, insurance companies, trust com-
panies, manufacturing and laundering companies, (to the
extent of capital actually employed in the state in manu-
facturing and selling products of such manufacturing,)
mining companies wholly engaged in mining within the
state, agricultural and horitcultural associations. Com-
panies owning or operating elevated railroads or surface
roads not operated by steam, and companies formed for
supplying water or gas, for electric or steam heating,
lighting or power purposes are also exempt from the tax.
To secure exemption, laundering, manufacturing, and
mining companies must have at least forty per cent of
their capital stock invested in property within the state,
and used for laundering, manufacturing, or mining pur-
poses. 42
From the tone of these provisions we may infer that
there has been a change in the general attitude towards
corporations. While once they had been favored and en-
couraged by special exemptions, and lax administrative
laws, they were now viewed as the owners of special priv-
ileges, properly liable to taxation. Some small tendency
appears, too, to depart from the principle of the general
property tax, although it remains in large measure the
basis of the system. In general, it is clear that, in these
42 The provisions for taxing corporations exempt from the annual
franchise tax on capital stock are discussed in the chapters dealing
with such corporations.
36 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
laws, corporations were to be dealt with more stringently
than individuals.
The law, as given above, left many points for judicial
interpretation. The question as to what "capital stock"
means, and how it shall be used in applying the law has
often arisen. The answers of the courts have not always
been consistent. The Court of Appeals defined it as mean-
ing not the share stock held by individuals, but the actual
capital which this represented. 43 As the basis for the
franchise tax it was the equivalent of the term "capital",
and was the amount of capital so employed upon which
the tax was to be computed. It further held that bonds,
whether United States bonds or not, in the absence of
proof that they were bought with a corporation's surplus,
should be treated as capital employed in the state, and
as a part of the basis upon which the franchise tax should
be computed. Holdings in other corporations were to be
treated in like manner.
Where no dividends were paid or where they were less
than six per cent, the actual and not the par value of the
capital stock employed within the state was held to be
the proper basis for computing the franchise tax. Where
there had been no dividends or sales of stock, the value
was to be determined by taking the value of the assets
after deducting liabilities and adding to the sum then re-
maining the value of the good will of the business, in-
cluding its right to conduct business under a franchise. 44
The tax was to be based upon capital activity employed
in its corporate business, and not upon the passive hold-
ing of it in unproductive land. A corporation whose entire
capital stock was issued in payment for an island consist-
ing of unimproved swamp land was not taxable on its
capital stock. 45 In case no dividend has been declared,
48 Commercial Cable Company vs Morgan, 178 N. Y., 433.
"People vs Roberts, 154 N. Y., 101.
"Niagara River Hydraulic Company vs Roberts, 30 Supreme
Court, Appellate Division, 180. The Court of Appeals later held
(198 N. Y., 250) that the law did not mean that capital stock should
be employed in business to render it taxable. If the stock was rep-
resented by real estate it must be deemed to have been "employed"
within the meaning of that expression of the law.
THE ANNUAL FRANCHISE TAX UPON CORPORATIONS 37
the Comptroller may estimate the value of the capital
stock at the average price for which the stock has sold
during the year although such price may exceed the par
value of the stock and thus indirectly tax the surplus. 46
The average amount of capital employed during the year,
and not the amount in use at any one time must be taken
as the basis for the tax. 47
The state had the power to impose a franchise tax,
even if substantially all the property appraised was ex-
empt by United States statute. 48 The imposition of the
franchise tax computed upon dividends was not a tax up-
on property, and did not violate the restriction of the fed-
eral constitution prohibiting states from interfering with
imports from other states or foreign countries. 49 The
part of the capital stock of a New York corporation rep-
resented by merchandise temporarily in the hands of sell-
ing agents outside the state, which is not sold but is
brought back into the state, is taxable. 50
The increase of exemptions from the annual franchise
tax led to the testing of the constitutionality of the law
in respect to the principle of uniformity. The Court of
Appeals held that by merely exacting a payment for the
privilege of exercising corporate powers, the state did
not impose a property tax. The legislature, it held, is
not bound to impose the same conditions upon all corpor-
ations for the privilege of doing business in New York.
It may grant or withhold the privilege in the case of
each corporation as it sees fit, and the rules relating to the
taxation of property do not apply. 51
These laws constitute the method for assessing the an-
nual franchise tax. The basis for the tax is capital stock
while the rate is determined by a number of variable fac-
tors dividends, market price of stock, and financial con-
46 Colonial Trust Company vs Morgan, 162 N. Y., 654.
47 Brooklyn Rapid Transit Company vs Morgan, 57 Supreme
Court, Appellate Division, 335.
48 U. S. A. P. P. Company vs Knight, 174 N. Y., 475.
"Matheson vs Roberts, 158 N. Y., 162.
50 Farmers' Loan and Trust Company va Wells, 180 N. Y., 16
" Vanderwort Company vs Glynn, 194 N. Y., 387.
38 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
dition of the corporation. The payment of this tax re-
lieves the capital stock from any other tax for state pur-
poses. It is, however, assessed locally for local purposes.
It seems an attempt has been made to consider the profit-
ableness of a company in determining the tax since classi-
fications are based upon dividends. Some of the diffi-
culties which have arisen under the law of 1880, as
amended, we shall consider the next chapter.
CHAPTER III.
PROBLEMS AND DIFFICULTIES OF GENERAL TAX ON
CORPORATIONS
Since 1880 corporations, except those exempt by
law, have borne the annual franchise tax upon their capi-
tal stock. This method is an improvement over the one
previously used and has not been void of good results. The
direct system of raising taxes for state purposes has been
superseded, to a great extent, by the indirect system. In
earlier years the direct tax was easily levied, was simple,
and largely satisfactory in operation. The few towns
and small amount of personal property went hand in hand
with a government of trivial expenses. As industrial or-
ganization became more complex the tax laws failed to
properly classify property and property owners, and in-
justice resulted. Personal property evaded assessment
while real property bore a disproportionate burden of the
tax. The amount of personal property increased rapidly
yet the amount found on the assessment rolls actually de-
creased from year to year. Not only was little personalty
reached, but the valuation of realty in the different dis-
tricts was so haphazard, either by accident or design, that
it became necessary to establish equalizing tribunals.
Equalizing, under the circumstances, could not be ade-
quate and much injustice remained.
The annual franchise tax attempts to remedy the evils
which had grown up. Personal property, undoubtedly,
is made to bear more of its legitimate burden while the
lack of uniformity through local assessments has been
eliminated. The evasion which arose under the require-
ment that personal property be assessed at the place of the
principal office has likewise been stopped.
From the standpoint of revenue and expense of collec-
39
40 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
tion the tax is in a large measure satisfactory. While
not as much is received from this source as in some other
states, it forms an important part of the income of the
state. 1 From 1900 to 1902 there was an increase of 200
per cent in the number of corporations taxed which of
course greatly increased the revenue. 2 The expense of
collection and administration has been less than one per
cent., and the number of corporations paying the tax in
1903 was more than 7500. There are now more than
40,000 corporations paying the tax.
Many difficulties and problems, however, still present
themselves. One which has always existed and which
still proves troublesome is in the determination of the
value of capital stock. The Attorney General, in his re-
port for i898, 3 quotes the language of the court in the
Union Trust Company vs Coleman, (126 N. Y., 443),
that * 'capital stock is not the share stock but the company's
capital and surplus which should be assessed at its actual
value when that is known or can be ascertained." A dis-
tinction was drawn between the capital stock of a com-
pany and that of the shareholder. That of a company,
it held, is simply its property existing in money or prop-
erty or both, while that of the shareholder is representa-
tive, not merely of the existing and tangible capital, but
also of surplus, dividend earning power, franchise, and
goodwill of an established business. The capital stock of
a company is .owned and held by the company in its cor-
porate character; that of the shareholders is owned and
held by them in different proportions as individuals. The
one belongs to the corporation, the other to the corpora-
tors. The actual value of the capital may be widely dif-
ferent from the share value although the par value always
corresponds to it. The law intended to deal with the com-
1 The income from this source is between three and four million
dollars. It is almost one-third of the amount received from all
forms of corporation taxes.
'This increase can largely be attributed to the legislation in 1901,
affecting the status of foreign corporations.
'Report of the Attorney General, 1898, Senate Documents, Vol.
1, No. 9.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 41
pany's capital, not with the share stock which it does not
own.
If this opinion were to be strictly followed the share
stock would have nothing to do with the subject of valua-
tion. Only the capital and surplus of the corporation, as-
sessed at its own value without regard to the selling value
of its shares, could be considered. The distinction which
the court draws is, of course, sound, but the value of the
one thing is often reflected in the value of the other. If
a company has a large amount of surplus from which
dividends are being paid, the share stock will be more
valuable. On the other hand, the value of a company's
capital is not always shown by the share value. If a com-
pany put its earnings into betterment it may cause a small
dividend which in turn will be reflected in a low selling
value of the share. Where the value of the capital stock
is difficult to ascertain the value of the share might well
be considered as one of the determining factors.
The courts have not consistently held to this opinion
but have deviated so frequently that it would be impos-
sible to follow their rulings in assessing the capital stock.
They have proposed one method where the dividend de-
clared is above six per cent, another where it is below,
and still a third for foreign corporations. There can be
no good reason for different methods of valuation in these
cases. Should it be considered desirable, as the court
procedure would indicate, that different classes of cor-
porations should not be taxed uniformly, the result should
be secured through the rate of tax and not through differ-
ent methods of valuation.
The legislative exemption of secured bonds 4 from taxa-
tion gives corporations a chance to evade all or part of
the annual franchise tax. Often stock is issued as a bonus
and the only real value received into the treasury is from
the sale of bonds. Such corporations exercise exactly the
4 The secured debts tax law was passed in 1911 (Chap. 802). By
its provision any bond secured by mortgage on real property, by a
deed of trust or real or personal property, or by the deposit of se-
curities as collateral is exempt from payment of taxes after a tax
of one-half of one per cent has been paid and stamps have been
affixed indicating the payment.
42 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
same franchise privileges as if their stock had been issued
for actual property. When the bonded indebtedness is
considered a liability and deducted from assets in determ-
ining the amount of capital stock, often there is little left
upon which to levy a tax. The franchise of such com-
panies are just as valuable as if all the assets were rep-
resented by shares of stock, yet the existence of bonds
makes the capital stock of little value for tax purposes.
Not only do bonds contribute to the evasion of the tax,
but the very fact that they are issued influences the classi-
cation of a corporation for the purpose of taxation. Bond
issues keep down dividend rates, which, according to the
law, are the basis upon which classification is to be made.
In cases where the tax is based upon the average market
value of the stock a heavy bond issue might materially
reduce the assessment.
It is generally believed that the corporate form gives
advantages for which the corporation should pay. If
the capital stock, through the annual franchise tax, be
taken as the basis for this payment, the system should
be clarified and simplified. The confusion arising from
court decisions between capital stock and capital as basis
for the tax should be cleared up. Capital stock is general-
ly taken to mean the share value, the actual value of which,
depending upon a variety of causes, may change from day
to day. This in itself would be an inefficient basis, but
might well be used as a factor in determining the value of
capital. By capital we generally mean the definite tangible
or intangible assets with which a corporation may do busi-
ness. Under this would come personal and real property,
such as cash, accounts receivable, merchandise, and all
items such as trade marks, good will, etc., which enable a
companyto carryout those purposes forwhich itwas form-
ed. Since such items are not always accurately reflected
in the share value the capital would form a much better
basis for the tax. The rules for classification, however,
should be simplified and the duties of the comptroller
lightened. The application of the present system to some
forty thousand corporations involves an enormous
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 43
amount of clerical work, and renders it difficult to detect
inaccuracies.
The complexity of the law is a disadvantage. In
1893 the legislative committee investigated the matter of
taxation. This inquiry showed that the complexity of the
law and subsequent amendments have made it still more
complex had caused many corporations to leave the
state. The witnesses before the committee contended for
the simplification of the laws so that corporations could
know what to pay and what might be collected. The
law has not been constructed on a scientific basis but has
been made piece meal by different legislatures. Mr.
George F. Seward said : "It is hardly conceivable, yet
true, that one cannot find by study of the statutes, any
indication that the work of any of these commissions
which have been apopinted during the last forty years,
or all of them together, have made any impression upon
the legislature." 5 The use of these complex measures
for taxing corporations instead of adopting some care-
fully worked out system has resulted in seriously burden-
ing some while others have practically escaped taxation.
Governor Dix is his message of July 12, 191 1 6 vigor-
ously attacked the complexity of the law :
Section 182, under which corporations are taxed for the priv-
ilege of doing business in a corporate capacity, has been a con-
stant source of litigation. It is so complicated that no ordinary
business man can understand its provisions and even the Court
of Appeals has complained that the legislature seems to have
tried to express a very simple idea in very complicated language.
Yet over forty thousand business corporations are assessed an-
nually under this statute and are compelled to make reports in
regard to which their officers are in hopeless confusion and even
their attorneys are frequently bewildered in their efforts to com-
ply with its provisions.
The law is difficult to interpret and as a result of its
vagueness and complexity millions of dollars are levied
with no certain rute. The assessment, moreover, is left
to one official with no possibility of proper check or sup-
ervision. The public can generally neither know the
basis of taxation nor whether the amounts collected are
proper or not.
"National Conference on Taxation, Buffalo, 1901. p. 116.
* Public Papers of Governor Dix, 1911, p. 73.
44 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
The complexity of the situation has discouraged rath-
er than encouraged the collection of the tax. Courts have
been busy determining which provisions of the law applied
to different companies. In one case at least they removed
from the list one whole class of property that had hither-
to paid the tax. 7 The decision held that a company or-
ganized for the purpose of purchasing and holding real
estate was not employing its capital in doing business in
the state. In this particular case the amount invested was
$150,000. Soon after the investment the property was
sold for $750,000 which would indicate that the company
had employed its capital in a fairly satisfactory business
transaction. In one year the decision caused 541 cor-
porations to be removed from the tax roll. This is but
an example of situations arising because of lack of clear-
ness. Here capital was "invested" and not "employed"-
hence the law did not apply. The Comptroller suggested
that if capital could be "invested" without being "employ-
ed" it was time to so word the statute that capital employ-
ed, invesed or held in the state would come under the law.
While this class of capital escaped entirely others have
been unduly burdened, and it was generally believed that
large sums of New York capital sought incorporation in
other states. Governor Odell, in his message of iQOi 8
pointed out that corporations were treated more liberally
in other states than in New York. This forced the capi-
tal to other states and New York lost the revenue which
they enjoyed at her expense. He pointed out that dur-
ing the previous year only $340,000,000 was organized
under New York laws while single corporations with a
greater capitalization than this had been organized in
other states.
This chaotic and complicated tax law can be account-
ed for because of the way by which it came into exist-
ence. The demands for revenue increased more than
eight times as fast as the population. As these new de-
mands for revenue arose a new tax was imposed to meet
'Annual Report of New York State Comptroller, 1900, p. xix.
'Governor Odell's Message, 1901. Assembly Documents, 1901,
Vol. 1. No. 2.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 45
the need and finally became imbedded as a part of the
regular system. That legislators allow such a system to
continue is not because they have never had their atten-
tion called to conditions. Practically every official and
organization connected with tax administration or inter-
ested in tax reform has pointed out the difficulties and
asked for remedies. The State Comptroller in his report
for 1899 said: "It is unfortunate, both as regards the
tax payer and the subject of taxation that many cases
arise where the determination of the courts must be had,
and where often times the tax assessed and collected is
inequitable and, aside from the letter of the statute law,
has no justification. n." 9 The opinions expressed in prac-
tically every other Comptroller's report have been simi-
lar, always decrying the complications and asking for
simplicity and justice. The newspapers have repeatedly
laid bare difficulties and criticized those responsible for not
giving relief. A number of special tax commissions have
been appointed to investigate the system which generally
reported the cumbersomeness of the law. The Commis-
sioners of Taxes and Assessments for New York city have
been active in advocating reform while the New York
Tax Reform Association has repeatedly drawn up laws
and amendments, and attempted in almost every con-
ceivable way to get some change.
A number of loop holes exist through which evasions
are possible, and which cause more inequality and in-
justice than should exist. Since the courts have held
that the taxes are a payment for past benefits and not for
future privileges, a number of corporations, especially
foreign, moved out of the jurisdiction of the state just
before being assessed. The amount of revenue lost by
such practices is considerable. The use of the amount of
capital "employed in doing business in this state" as a
basis for the tax allows much capital to escape taxation.
This is especially true of foreign corporations and will
be discussed in Chapter IV.
Corporations which pay the annual franchise tax are
9 Annual Report New York State Comptroller, Assembly Docu-
ments, 1899, Vol. 1, No. 3.
46 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
exempt locally from all taxation upon personal property
for state purposes. Since the real estate is not exempt,
injustice is borne by the corporation with a comparative-
ly large amount of real estate. The State Comptroller in
his report for IQOO, 10 said that a company doing manufac-
turing business pretty generally took advantage of the
provision. For example, he said, a company may em-
ploy one or two thousand dollars in handling goods of
other makers and pay a tax of a few dollars. By doing
this it secures exemption from local taxation on personal
property for state purposes when it may have several
thousand dollars which would otherwise be subject to
snch tax. This again discriminates unjustly against the
holder of a large amount of real estate. Stock-watering
has also been extensively practiced. This keeps the rate
of dividend low, and puts the corporation in a class with
lower taxation even though the return upon the actual
investment may be high.
The methods employed for dealing with delinquent
companies have not been entirely satisfactory. The pro-
cedure is for the Comptroller to issue a warrant to the
county sheriff, ordering him to sell the property of the
company in order to satisfy the tax claims. It is difficult,
however, for the sheriff to sell such intangible property
a? good will, services, etc. Neither have sheriffs appear-
ed to be over-zealous in attempting to find property upon
which to levy a tax claim. When it is found, moreover,
it is often so heavily encumbered that under a sheriff's
sale there would be little equity left to the state to satisfy
taxes and cost of collection. An attempt has been made
to deal with delinquents through annulling their char-
ters. If a tax account remains unpaid for a year and the
Comptroller is satisfied that the delay is intentional, he
notifies the Attorney-General to bring action to annul
the charter.
The method of dealing with other forms of delinquen-
cy, such as failures to file a report, is also inadequate, ex-
pensive, and time consuming. Action must be by the
Attorney-General at the instance of the Comptroller. In
" Annual Report of the New York State Comptroller, 1900, p. xxi.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 47
many cases enforcement is practically impossible. This
system may have been fairly efficient when it was inaugu-
rated for then there were only some two thou-
sand corporations on the taxing list, but there are now
more than forty thousand demanding the attention of
the bureau. More than five per cent of these, moreover,
are delinqunt in some way every year. To expect the
Attorney-General annually to commence proceedings in
over eight hundred cases is unreasonable. Annulment of
the charter by the Comptroller in cases of intentional de-
linquency would perhaps be an adequate remedy. This
would have the incidental advantage of doing away with
a number of corporations which exist only on paper.
The taxation system has been severely criticized be-
cause it does not place the same burden upon individuals
as is placed upon corporations. By individuals is meant the
large business organizations in the form of partnerships.
The regulations applicable to corporations do not apply
to individuals. Corporations are subject to special kinds
of taxation which individuals escape. Many examples
exist where corporations are burdened much more heavily
than other companies doing practically the same kind of
business. The manner of assessment is entirely differ-
ent. Corporations must prepare technical and compli-
cated reports which make the advice of an attorney neces-
sary while the individual, taxed only locally, is assessed
before the local assessor. Individuals may deduct all
personal debts while no such deductions are allowed to
corporations. Granting these discrepancies, we cannot
conclude, however, that all business organizations should
be taxed on the same basis. In so far as the corporate
charter grants advantages and privileges there is no rea-
son why they should not be compensated for in the form
of taxes. If the price asked be too high there is nothing
to compel new business enterprises to take on the corpor-
ate rather than the partnership form. A heavy tax on
corporations, however, may prove to be an unjust burden
to those already in existence. For many corporations it
would be next to impossible to change to a partnership
organization. Since corporations have proved partial-
48 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
larly efficient in the development of industry and there-
fore socially desirable, taxes should not be so oppressive
as to discourage this form of organization.
These are some of the difficulties connected with tax-
ing corporations for state purposes. The assessments of
corporate property, both real estate and capital stock, 11
for local purposes likewise presents difficulties. Although
statistics for local taxes are not available, there is no
doubt that the aggregate is much larger than the taxes
paid for state purposes. The assessments are made by
local officials under practically the personal property tax
system. Here the evils of the system are enhanced by the
complexity and magnitude of the assessments. Real
estate is assessed at its situs while the capital stock is
assessed at the place of the principal office. Since corpo-
tions may choose the place for their principal office it is
possible to shift this from one district to another to escape
taxation. Instances have arisen, both among domestic
and foreign corporations, where this has been done.
Where the shifting is with a view to securing better terms
of assessment it is sometimes done with the collusion of
local tax officials. Assessors are sometimes lenient in
order to get the corporation to declare its principal office
in their district. Many New York city corporations,
whose business is practically all located there, have de-
clared their principal office to be located elsewhere. Such
practices, of course, work injustice among districts and
among corporations. The very possibility of its existence
is enough to condemn it and demand reform.
The valuation of real estate by the different assessors
affords a special problem in the case of corporations.
Very often the assessor can only take the officers' word
for the valuation since he himself is not competent to
judge. Different districts are desirous of increasing
their population and business by having industries locate
"Article 1, Section 11 of the tax law would indicate that all per-
sonal property was to be assessed and taxed locally. In the instruc-
tions for preparing the assessment roll, section 21, however, pro-
vision is made only for assessing the capital stock as provided for
in section 12. This causes only capital stock to be assessed and is
another illustration of the inconsistency of the tax law.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 49
within their borders, and promises of low taxes are often
given as an inducement. Injustice is found here as well
as in the assessment of personal property and measures
are needed to abolish the practices which exist.
The method prescribed by law for the assessment and
taxation of the personal property of corporations for local
purposes is so complex that few, if any local assessors are
able to apply it. It is not the value of the share stock
that is the basis of taxation, but rather he capital invested
in the business. The formula which the assessors are ex-
pected to use is somewhat as follows : On one side of
the assessment roll is to be placed the value of the total
assets of the corporation including the entire value of
real as well as personal property, non-taxable as well as
taxable. From this is to be deducted the other side of the
assessment roll on which is found the value of the stock
owned by the state and incorporated charitable or literary
societies ; all property exempt by law, including shares of
stock of other corporations ; the assessed value of the real
estate; debts and surplus, if any, up to the amount of ten
per cent of the capital.
The sum secured by this process represents the assess-
able value of the capital stock. Corporations are requir-
ed to make reports but the information thus obtained is
vSo inadequate as to be of little use to the assessors. Since
judges and lawyers have failed to reach an agreementn as
to the meaning of the law, the assessors cannot be ex-
pected to use it successfully. They generally assess indi-
viduals and corporations in the same manner. Since per-
sonalty so largely escapes an unjust burden falls upon
corporations with a large percentage of real estate.
Because of these difficulties many have advocated
that the local assessment of personal property of corpor-
ations be abolished. The State Tax Commission in 1898
made such a recommendation. 12 It contended that the
other corporate taxes involved the taxation of personalty.
Tt wanted to equalize and extend the other taxes so as to
reach the source of personal investment, and at the same
time relieve the assessors of the hopeless task of finding
"Annual Report of New York State Tax Commission, 1898, p. 11.
50 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
personal property. The special tax commission which re-
ported in igo/ 13 thought it advisable to extend the sys-
tem of taxing corporations for state purposes so as to in-
clude all corporation taxes. It would allow real estate to
continue to be taxed locally, but all personal property
taxes were to be taken care of through an increased fran-
chise tax, a part of which was to be returned to the local-
ity. Such a scheme was calculated to give greater equity
and more revenue to both the state and the locality.
The State Comptrollers for a numbei of years have
been asking for reform but without success. The State
Conference on Taxation in 1911 unanimously adopted a
resolution asking that the taxes be determined by some
simple rule. Governor Dix in his message of 1911 dealt
extensively with corporate taxation and asked for re-
form. 14 He suggested that the annual franchise tax be
computed upon the par value of the stock. This would
insure simplicity in calculation which any tax-payer could
understand, and would also eliminate the necessity for the
frequent arbitrary judgment of taxing officials. He gave
his sanction to a bill which had been introduced proposing
a minimum tax of three-fourths of a mill on each dollar
of issued capital stock. This was designated as a tax for
the privilege of using a corporate name and exercising
corporate power. Taxes were to vary with different
classes of corporations depending upon the amount of
dividends paid.
This scheme evidently would have been easy to under-
stand and administer, and would doubtless have eliminat-
ed much of the litigation caused by the present procedure.
It would act as a check upon taxing officials since in each
case the amount of the tax paid could easily be compared
with the basis upon which it was levied. A further ad-
vantage would arise in the tendency to reduce inflated
capitalizations. As a license tax little objection can be
made to the scheme.
"Report of the Special Tax Commission, 1907, Senate Docu-
ments, 1907, Vol. 5, No. 11.
" Message of Governor Dix. Public Papers of Governor Dix,
1911, p. 73.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 51
The report of the Comptroller for 1911 dwelt on the
ambiguity and uncertainty of construction in the law.
Although his recommendations were adopted by the Sen-
ate, they failed to reach a vote in the House. At the ex-
traordinary session of that year he made another unsuc-
cessful attempt. He suggested that the annual franchise
tax be upon the basis of capital stock. The tax, to be
paid annually in advance, was to be computed upon the
basis of the capital stock employed during the preceding
year within the state. The amount of capital stock was
to be such portion of the issued capital stock as the gross
assets of the business in the state bore to the entire gross
assets. The tax rate was to vary, according to dividends
paid, from three-fourths of a mill where no dividends
were paid to one-fourth of a mill for each one per cent of
dividends above six per cent. The minimum tax was
fixed at five dollars. The scheme would have eliminat-
ed many of the administrative difficulties yet some injus-
tice would doubtless have remained.
The organization tax has been much discussed. It is
generally connected with the phrase "driving capital from
the state." If the organization tax be high it is believed
capital will seek organization in the more favorable states.
From the standpoint of revenue this could make little
difference aside from the organization tax itself, if the
foreign corporation tax laws are properly framed. The
possibility exists, however, that, where advantages of lo-
cation are negligible, and industry may seek the state of
lower organization tax. The loss comes largely to the
forms of business which would partially depend upon the
industry if located within the state. While the organiza-
tion tax does not have the effect commonly supposed it
may be well to gauge it somewhat by similar taxes in
other states.
The complete separation of the sources of state and
local revenues has been advocated by some as a cure-all
for tax evils. No doubt some sources of revenue are bet-
ter suited for state taxation, and should be taken over
by the state. The great body of local tax payers should
not be freed, however, from all state responsibility. In
52 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
New York a small amount of the taxes collected locally
are used for state purposes. Under complete separation
the great majority of voters would have no interest in
the state revenues other than how they would be spent.
Who would bear the expense, would be of little concern
and it is not hard to imagine that unwise and burdensome
appropriations might be made. However desirable the
separation of state and local revenues may be from the
administrative standpoint, the social defects overshadow
the advantages. In order that the majority of the citizens
retain their interest in state offairs and may not be tempt-
ed to squander revenues they do not help to pay, it is de-
sirable that a part of the locally collected taxes be used
for state purposes.
It seems the personal property tax is strongly in-
trenched. Many tax authorities would willingly adopt
the income basis. The past lethergy of the legislature,
however, would indicate that we need not expect such a
step in the near future. The first reform we can hope to
secure is to make the old system more workable as well
as more just. In the past recommendations of officials
and commissions have met with little sucess. The recent
success of reforms, however, in other phases of taxation,
leads us to hope that the legislature will yet attempt to
simplify corporate taxation. The sooner this can be ac-
complished, through the adoption of some suggestion al-
ready made or otherwise, the sooner will the courts be
relieved of part of their burdens, the sooner will cor-
porate officials be able to calculate the amount of taxes
they may be expected to pay, and the sooner will state
officials be relieved from much of the unnecessary admin-
istrative burden now borne by them.
THE STOCK TRANSFER TAX 15
Before leaving the discussion of the general taxation
fer tax. In 1881 a bill was introduced proposing to levy a
tax of one-fifth of a mill on every dollars of brokers' sales.
of corporations we shall briefly consider the stock trans-
u In reality this is not a tax upon corporations but upon the ex-
change or sale of shares of stock. It does, however, affect them
indirectly.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 53
In 1887 a bill was introduced to tax the sales of stocks
and bonds. Neither bill became a law, and it was not
until several years later that the subject came up again.
In 1905 the stock transfer tax law was added to the gen-
eral tax law. 16 By this act a tax of two cents on every
$100, face value, was placed upon the sale or exchange
of shares and certificates of stock of all foreign and do-
mestic corporations after June i, 1905. Depositing stock
as collateral security is not taxable. The payment of
the tax is denoted by affixing adhesive stamps, either to
books of company making sale (if sale be recorded) or to
the memorandum or certificate of transfer where such is
given. Heavy penalties are provided for failure to affix
stamps, using canceled stamps, etc., while shares of stock
transferred without the payment of the tax cannot be
made the basis of legal proceedings.
As might be expected the constitutionality of the law
was attacked from every possible angle. The greatest con-
tention was that it is class legislation, hence contrary to
state and federal constitutions. Both the Court of Ap-
peals 17 and the United States Supreme Court held that the
tax was not upon property but upon the transfer of prop-
erty. Since it was uniform in operation upon all trans-
fers and upon all persons making them, it contravened
neither the state nor federal constitution. The complaint
upon interstate commerce was likewise rejected.
In I907 18 the law was amended so as to make the basis
for the tax "each share of $100 of face value or fraction
thereof," instead of "each $100 of face value or fraction
thereof." The amendment made the share, whatever its
value, the basis for the tax. By its provisions the tax on
loo ten dollar shares would be two dollars while the tax
on ten one hundred dollar shares would be twenty cents.
In these two cases the share value was the same yet the
tax differed by one dollar and eighty cents. The Court
of Appeals refused to sanction such discrepancies on the
ground of class legislation since all corporate share hold-
"New York Statutes, 1905, Chap. 241.
"Hatch vs Reardon, 184 N. Y., 431. Affirmed 204 U. S., 157.
" New York Statutes, 1907, Chap. 414.
54 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ers were not treated alike. The legislature had exceeded
their power of classification since such must have some
other basis than mere accident, whim or caprice. 19 The
provision of the law which authorized the comptroller to
secure evidence of violation from the private books of the
company was likewise declared unconstitutional. 20 . Cer-
tificates of shares turned over to a trust company under
the voting^ trust arrangement, however, were held liable
to' the tax. 21
The Comptroller has experienced difficulties in examin-
ing the records of offices to ascertain whether the law
has been complied with. At first the state was defrauded
of thousands of dollars because of the wholesale washing
and reusing of stamps. Detectives were put to work,
however, the offenders arrested, and the practice in a
measure checked. Evasions, it w r ould seem, are still pos-
sible since the amount of sales reported on the exchanges
is much larger than the sale of stamps would indicate.
The system of "balancing" and "paying on differences"
which is used among brokers will partially explain the
difference.
Because of evasions, the Comptroller, in his report
for 1908, estimated that the state was losing $2,000,000
a year. He suggested as a corrective measure that every
person selling shares be required to make a monthly state-
ment showing the amount of sales, together with the de-
nomination and number of stamps used in paying the tax.
The system recommended was practically the same as is
used in the United States revenue. The desired modifi-
cations were not secured. In 1910 a bill making it un-
lawful for any but authorized agents to sell stamps, and
then only at face value, passed the Senate. In the House
the opposition which developed in the interests of the
stamp dealers caused the defeat of the bill. A second at-
tempt was made at the extraordinary session but with
similar results. It was not long, however, until a law 22
M Farrington vs Mensching, 187 N. Y., 8.
"Ferguson vs Reardon, 197 N. Y., 236.
21 U. S. Radiator Company vs New York, 208 N. Y., 144.
21 New York Statutes, 1911, Chap. 12.
PROBLEMS AND DIFFICULTIES, GENERAL TAX ON CORPORATIONS 55
was passed permitting only authorized agents and banks
to sell stamps. This has been effective in cutting down
losses from fraudulent transactions. It has also been
made the duty of the person making the sale to procure
and affix the stamps. Corporations must keep such re-
cords as the Comptroller may require, showing date of
transfer, numbers of certificate issued and names of pur-
chaser. Such records must be kept for two years.
The tax met with opposition, not alone from those
directly affected but from other sources. Just after its
constitutionality had been affirmed, it was attacked on the
ground that it established a dangerous precedent for the
taxation of energy and industry. 23 New York city bus-
iness men felt that it was a discrimination against the
city. The law had the effect of checking the increase of
transactions on the stock exchange. Transactions in-
creased much more rapidly on the Boston and Philadel-
phia exchanges than on the New York exchange. 24 If
the law can be shown to greatly check stock exchange
transactions its advisability can be questioned. The stock
exchange is not all a gambling den and productive of no
good as is generally believed. It exercises an important
function in establishing a comparatively stable market for
securities which greatly aids the progress of industry.
It has been advocated that the tax be increased from
two to five cents. There is just as much reason for choos-
ing the one as the other, it is claimed, while the latter
would greatly enhance the revenue. The revenue now
secured is quite large and it would be well to leave any
possible increase till an emergency arises when it can be
used to provide the flexible feature which a good tax sys-
tem should possess. It would be better, in some ways, if
the tax were based upon the market rather than the par
value of the stock. There is no very good reason for
taxing a one hundred dollar share selling for three hun-
dred dollars as much as one selling for twenty-five dol-
lars. A market value basis, however, would increase
28 The Outlook, May 5, 1906. Vol. 83, p. 5.
"Pennsylvania adopted the stock transfer tax in 1915 while
Massachussets adopted it the previous year.
56 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the administrative difficulties of the tax. In general it is
a fair tax, easily assessed and productive of considerable
revenue.
CHAPTER IV
THE TAXATION OF FOREIGN CORPORATIONS
The treatment of foreign corporations in New York
State has varied widely. The legislature has dealt with
such corporations, either by enacting statutes which af-
fected the class as a whole or by laws designed for a par-
ticular kind, as insurance companies or banks. We find
that the first legislation was most drastic. Until the
year 1814 the insurance business was left entirely open
to all who chose to undertake it. In that year the Phoenix
Fire Insurance Company of London established an agency
in New York. Since at this time England and the United
States were at war and contracts with alien enemies could
not be enforced, a bill, entitled, "An Act to Suppress
Foreign Influence in this State," was introduced into the
legislature. After an amendment had been added, which
explained the object of the bill, it became a law. 1 All
foreign insurance companies or their agencies were ex-
cluded from carrying on business in the state under a
penalty of one thousand dollars for violation. This oc-
curred at a time of exasperated feelings toward England
but it had a marked influence upon later legislation con-
cerning alien insurance companies. This action was not
intended to apply to companies which were chartered by
other states and doing business in New York, but it was
not long before laws dealing with this class were added.
Since at this period insurance companies were the only
foreign coporations which did business of any importance
within the state, the laws were made applicable to this
class alone. A law passed in 18242 stipulated that any
person who thereafter acted as an agent for any individ-
1 New York Statutes, 1814, Chap. 49:
2 New York Statutes, 1824, Chap. 257.
57
58 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ual or association of individuals which was not incor-
porated under New York law, (even though they were
formed under laws of other states) for the purpose of car-
rying on a fire insurance business, must render to the
comptroller an annual sworn statement of the amount of
premiums which he or any other person had received for
insurance effected by him. The statement was to be for
the year ending September first, and on or before Febru-
ary first he was to pay into the state treasury ten per
cent on the amount of all premiums. To insure that the
stipulated returns would be made a bond of one thousand
dollars was required of every agent. If such were not
furnished within three months after the passage of the
act he was to be fined five hundred dollars. This was the
system by which the foreign companies were taxed until
1837 when the law 3 was modified so as to reduce the tax
on premiums from ten per cent to two per cent. Domestic
companies came under the general corporation tax law of
1823 and were taxed upon capital stock while the foreign
ones were taxed upon premiums received. This lack of
uniformity in the basis for the tax was not accepted as
entirely satisfactory by the officials. 4 In reality, it
amounted to a discrimination which operated very unfa-
vorably to the foreign companies, for the taxes imposed
proved to be almost prohibitory. A committee was ap-
pointed to investigate the taxaion of foreign insurance
companies and made a report to the legislature in i847. 5
They admitted, with some reluctance, that foreign cor-
porations must be taxed upon a different basis from do-
mestic, but opposed a suggested increase in the rate.
They held that the citizens of the state and especially of
New York City had suffered from the prohibitory taxes
which had been placed upon foreign insurance companies.
The business interests of the community, they said, re-
quired the encouragement rather than exclusion of for-
8 New York Statutes, 1837, Chap. 30.
4 The report of the Committee on Banks and Insurance Com-
panies, (Assembly Documents, 1845, No. 80) pointed put that this
dual classification of the companies caused trouble in trying to
equalize the tax paid by different companies.
ly Documents, 1847, Vo. 8, No. 251.
THE TAXATION OF FOREIGN CORPORATIONS 59
eign agencies, at least until such time as the state, by
wise and judicious laws, should secure the establishment
of insurance funds sufficient to meet the exigencies of
ordinary business. They even questioned the constitution-
ality of the law, suggesting that it ran counter to the fed-
eral constitution. 6 Because, then, of the doubtful con-
stitutionality of the law and the wholesale evasions which
were practiced under it, they asked for its repeal.
While early legislation was thus distinctly hostile to
insurance companies incorporated without the state, the
first law dealing with foreign capital in general was of
a very different nature. In 1851 the legislature attempt-
ed to increase the amount of foreign business carried on
in the state. A law passed in that year 7 provided that
products from any state of the United States which were
consigned to agents in New York, would not be assessed
to the agents. Neither were the agents- of moneyed cor-
porations or capitalists to be taxed for any moneys in
their possession or under their control, transmitted to
them for the purpose of investment or otherwise. Under
such an act there is little doubt that there was discrimina-
tion in favor of the foreign organizations. Not only was
a large part of the money sent here free from tax but
practically all goods manufactured outside the state and
sent here for sale escaped taxation. The money in the
hands of citizens and corporations of the state no doubt
escaped taxation to a large extent, which made the dis-
crimination here more formal than real. The exemption
"Federal Constitution, Art. 4, Sec. 21. This provides that the
citizens of each state shall be entitled to all privileges and immuni-
ties of the citizens in the several states. It has not been held, how-
ever, as applicable to corporations. A corporation is an artificial
person but not a citizen. Chief Justice Taney pointed out (Bank
of Augusta vs. Earle) that a corporation could have no legal ex-
istence outside the boundaries of the state by which it was created.
It existed only by force of law and where the law ceased to oper-
ate, the corporation could have no existence.. It was by the law
of comity among nations, he pointed out, that a foreign corporation
was allowed to make contracts and sue in the courts of another
state. Neither is it unlikely that a state, thru the exercise of its
"police power," could discriminate against foreign corporations so
long as it was considered that the protection and welfare of its
citizens demanded it.
T New York Statutes, 1851, Chap. 176.
60 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
of goods sent to the state, on the other hand, worked as
a burden upon the domestic producer since the home-
made goods could not easily escape taxation yet had to
compete with the goods which were sent into the state.
The law in this form, however, was of short duration.
In 1855 a statute 8 was passed which provided that all non-
resident persons and associations doing business in the
state, as merchants or bankers, whether as principles or
as agents, should be assessed and taxed on all sums in-
vested in such business as if they were residents. Al-
though this law did not affect money sent here to be in-
vested yet it eliminated to a great extent the other forms
of discrimination which existed under the previous
law. There was at least an attempt to place foreign cor-
porations upon a par with those incorporated under the
New York laws.
It soon became evident that both the general law r and
the one affecting insurance companies needed interpre-
tation by the courts at some points. The assessors had
put upon the assessment roll the amount deposited with
the Comptroller as a perequisite to doing business in the
state. 9 The British Commercial Company refused to pay
the tax upon this and carried the case to the Supreme
Court. 10 which held that securities so deposited were to
be considered as an investment and were liable to assess-
ment and taxation. 11 It was also necessary that the
courts make some determination with regard to the situs
of property. Any personal property of a non-resident
which was located in the state was liable to taxation, with
only such exceptions as the statute law had made. 12 This
New York Statutes, 1855, Chap. 37.
9 Chapter 95, New York Statutes, 1851, required a deposit of one
hundred thousand dollars in securities with the comptroller.
10 British Commercial Life Insurance Company vs Commsisioner
of Taxes, 28 Barbour, 318.
"In 1853 (New York Statutes, Chap. 463) the requirement of a
deposit with the comptroller was repealed, and the court held (Peo-
ple vs New England Mutual Life Insurance Company, 26 N. Y.,
303) that even though some corporations did not immediately with-
draw the securities, they were no longer taxable as money invested
in the state.
11 Hoyt vs Commissioner of Taxes, 23 N. Y., 224.
THE TAXATION OF FOREIGN CORPORATIONS 61
was to apply only to property which was capable of hav-
ing a situs and which really had one. Property in transit
through the state for instance, was not taxable. In an-
other case 13 it was held that goods which a non-resident
owner had sent to the state for the purpose of sale, with-
out reinvesting the proceeds, were not liable to be taxed.
The act, it held, was only designed to reach the capital
of non-residents which was employed in the state in a
continuous business, and not property sent merely to find
a market. The last two decisions were reversals of the
opinions of the lower courts and increased inequalities
between domestic and foreign producers.
By a law of i862 14 life and health insurance companies
from without the state were put upon the same basis as
other insurance companies, especially in regard to the two
per cent tax on premiums. In 1865 the attitude of the
legislature towards retaliatory methods was shown.
Some states it seems, had been discriminating against
New York insurance companies. A law 15 was passed
aiming directly at such states. 16 It provided that if any
state imposed greater penalties upon an insurance com-
pany incorporated under New York laws than upon its
own companies, then equal penalties should be imposed
upon companies from that state doing business in New
York. The state of Pennsylvania required a payment of
three per cent of the premiums received by a foreign in-
18 Parker Mills vs Commissioner of Taxes, 23 N. Y., 242.
M New York Statutes, 1862, Chap. 300.
18 New York Statutes, 1865, Chap. 694.
16 The general facts with regard to retaliatory insurance taxation
are well known. To a greater or less degree the majority of the
states have used this weapon against foreign insurance companies.
In 1910 the National Tax Association adopted a resolution to the
effect that a uniform method of taxing premiums, both foreign and
domestic, should be adopted by the several states. Hon. Geo. Curtis,
at a general public hearing on the report and bill of the Wisconsin
Tax Commission relating to the taxation of life insurance companies
reviewed the facts and effects of "retaliation" taxation upon insur-
ance companies. He thinks such laws have often served a just pur-
pose, and if their existence and enforcement would tend to secure
the needed uniformity, it would be an additional reason for their
retention. If the laws should become uniform, then the retaliatory
effect would become inoperative.
62 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
surance company. Because of this the court held 17 it
justifiable that New York should demand the same per-
centage of premium from a company incorporated in
Pennsylvania.
The scheme of taxing foreign corporations was, how-
ever, far from satisfactory. The court had decided 18
that the part of the law of 1851 which exempted from tax
the capital in the hands of agents for the purpose of in-
vestment was not repealed by the act of 1855. A large
amount of capital which practically escaped taxation con-
tinued to come into the state.
The practice which foreign banking houses followed
is a good illustration. They would have a permanent
agency established in the state to which they would send
money to be employed in temporary loans. Since they
were subject at all times to the control of the home office,
such funds were held to be exempt from taxation. A large
number of banking houses of other states and Canada
established such agencies. They came and received the
protection of the laws, courts, and police, yet paid no
taxes. This was a discrimination in favor of foreign
capital since the domestic institutions of the same kind
were taxed, at least upon their capital which, in part, was
the basis of their ability to extend loans. In addition
to the local burdens, national banks had to bear the tax
imposed by the federal government. Because of the tax,
the profits which the foreign representatives received were
greater than the domestic houses realized upon similarly
employed capital. Year after year the state assessors
and comptrollers pointed out the evils and asked for re-
form. They did not ask for legislation which would
make it difficult for foreign capital to come to the state,
but for some measure which would put all upon an equal
footing. "The owners of foreign capital," said the as-
sessors, "would have no cause for complaint if taxed in
the same manner as citizens, but citizens have a just cause
17 People vs Fire Association, 92 N. Y., 311. Affirmed, 119 U. S.,
110.
M Bank of Montreal vs Commissioner of Taxes, 59 N. Y., 40.
THE TAXATION OF FOREIGN CORPORATIONS 63
for complaint when the laws favor foreign capital. 19
The noted tax commission which reported in 1871 20
recommended that foreign insurance companies be assess-
ed and taxed under the laws which applied to domestic
companies, and that thereafter the same statute should
apply to both.
To illustrate the way in which the law as interpreted
worked, we shall notice the case of the Manchester Plate
Glass Company. This was an English concern which
maintained a store in New York City. They were assess-
ed $150,000 upon goods not contained in the original
packages in which they were imported. The assessment
was not allowed to stand because the proceeds from the
sales were not invested here but were remitted to the for-
eign house. In reality, the way in which the law was en-
forced and interpreted placed no tax upon the foreign
banking business carried on in the state, while domestic
capital used in the same business was taxed.
The products of foreign manufacturers, under certain
conditions easily complied with, were exempt from tax-
ation while the domestic manufacturers of similar articles
were taxed. The Commissioner of Taxes and Assess-
ments for New York City, in his report for i87? 21
says that if the purpose were to specifically protect for-
eign capital and foreign industres at the expense of home
capital and industries no more effective law would be
needed. He asked for some equalizing remedy either
to tax foreign industry or remove the burden from home
industry.
Finally, in 1880, the legislature responded to these de-
mands and passed two laws, one relating to the taxation
of foreign bankers 22 and the other to fire and marine in-
surance companies. 25 The first of these stated that every
"Annual report of the State Assessors, 1880, Senate Documents,
1880, Vo. 1, No. 26.
" Assembly Documents, 1871, Vol. 3, No. 265. See note. p. 16.
21 Annual Report, Commissioner of Taxes and Assessments, New
York City, 1877.
a New York Statutes, 1880, Chap. 596.
28 New York Statutes, 1880, Chap. 542.
64 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
organization, created under laws other than those of New
York, and in any manner engaged in banking business
in the state, was to pay annually to the state comptroller
a tax of one half of one per cent on the average of all
sums of money used in the state during the year. The
organizations were required to make returns which would
give the proper data upon which to base the assessment.
As a penalty for any failure to make the required returns,
the law provided that ten per cent of the amount of the
tax should be added. With regard to fire and marine
insurance companies, it was provided that such organiza-
tions, created without the state, should pay a semi-annual
tax of eight-tenths of one per cent on the gross premiums
which they received from business transacted within the
state during the previous six months. They were to
make semi-annual reports which would show the amount
of the premiums they had received. Lands and real estate
were to be taxed where situated, but capital stock and
personal property were to be exempt. We note here the
introduction of the semi-annual payment of the tax, a
feature which is in use in many of the western states with
all taxes, but which we do not generally find in New
York. In these two laws opposite tendencies are quite
marked; in the case of banks, a tax was imposed which
did not before exist while in the case of fire and marine
insurance companies the tax was reduced. Foreign cor-
porations, other than those just discussed, were affected
by the general corporation tax legislation of 1880 and
1 88 1. By this, the capital of foreign corporations as well
as that of domestic corporations was made subject to the
annual franchise tax. The court held, 24 too, that the
basis of the annual franchise tax for foreign corporations
was the entire capital and not the portion of it which was
employed within the state. Such a principle was unques-
tionably unjust, but such was the law until 1885. In that
year the legislature limited the franchise tax to the
amount of capital employed in the state.
This legislation did not receive the approbation of the
foreign corporations. Shortly after the passage of the
* People vs Horn Silver Mining Company, 105 N. Y., 76.
THE TAXATION OF FOREIGN CORPORATIONS 65
law representatives of these organizations met in the Met-
ropolitan Hotel to take some action of protest against
the tax levied upon their capital stock. It was claimed
that the law under which they were required to make
statements to the comptroller in regard to their business
was a discrimination against them. The tax was collect-
ed directly by the comptroller and was based entirely up-
on the success of the business. The reports which were re-
quired worked a hardship upon them since it threw their
business open to the inspection of their competitors. Such
were some of the grievances and the meeting resulted in
the unanimous adoption of a resolution instructing a com-
mittee to prepare petitions to the legislature asking for
the repeal of the law r s. Every corporation interested was
assessed one-fourth mill on every dollar of their capital
stock to pay the expenses of such suits as might be insti-
tuted by the comptroller to enforce the payment of taxes
under the law. The results of this meeting show that
the foreign corporations were not going to surrender the
privileges which they had enjoyed without a fight, and
subsequent litigation shows that they made use of the one-
fourth mill assessment.
As might be expected the new legislation caused a
large amount of litigation. A few cases will suffice to
illustrate the nature of the difficulties left for the courts
to decide. One of the troublesome problems was to de-
termine when a corporation was doing business in the
state. The American Bell Telephone Company had been
carrying on a business in the state through local compan-
ies acting as its agents. It had no officers but did its bus-
iness entirely through agreements made with local com-
panies. Because of this arrangement, it claimed that it
was not doing business here under the meaning of the
law. The lower court held 25 that in order to render any
company taxable, no proportionate amount of its business
was required to be transacted in the state. If any of its
business had been carried on in any way, it was liable to
28 People vs American Bell Telephone Company, 50 Hun, 114.
66 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the tax. The Court of Appeals 26 refused to take this
view and held that where the foreign company had leased
and licensed the use of telephones in the state under con-
tract between the parties, it was not carrying on business
under the meaning of the act. The business which was
carried on, it held, was being carried on by the local com-
panies and they were subject to the tax. In another
case 27 it was held that a company which was organized
under the laws of another state and which had property
in New York, could not claim exemption from taxation
on account of the laws of its own state.
The question of interference with interstate commerce
was one which very frequently arose. Of the multitude
of cases which came before the courts we shall note but
two typical ones. A manufacturing company which did
a part of its business in the state claimed that the regula-
tion of commerce between states was the sole prerogative
of the federal government, and that the taxation violat-
ed this principle. The Court of Appeals held 28 otherwise
and ruled that there is no limitation upon the power of a
state to exclude a foreign company from doing business
within its limits, or to exact conditions for such privi-
lege, save when the corporation is in the employ of the
federal government or where its business is strictly com-
merce. The fact that legislation upon the subject might
indirectly affect commerce did not render it unconstitu-
tional. Property engaged in foreign or interstate com-
merce, might be taxed the same as domestic property but
no more.
The other case which we shall notice was one involving
the Pennsylvania Railroad. The line of the company ex-
tended into other states but not into New York. It oper-
ated a ferry in connection with its road across the Hudson
"People vs American Bell Telephone Company, 117 N. Y., 241. In
New York the Court of Appeals is the highest court and corres-
ponds to the Supreme Court of many states.
"People vs Coleman, 135 N. Y., 231. The court here said that it
seemed the legislature might constitutionally impose double tax-
ation but its purpose so to do may never be inferred, but must
plainly appear.
28 Southern Cotton Oil Company vs Wemple, 131 N. Y., 64.
THE TAXATION OF FOREIGN CORPORATIONS 67
to the city of New York where it had terminal facilities.
It used these facilities for receiving and delivering freight
and passengers. It collected money there for tickets and
maintained a large force of workmen. This terminal
was assessed and taxed; then the company carried the
case to court on the ground that the state was interfering
with interstate commerce. The court of Appeals re-
fused 29 to allow the tax to stand since the business engag-
ed in was exclusively that of interstate commerce. A for-
eign corporation which was engaged both in the business of
state and interstate transportation in the state was, how-
ever, subject to taxation in common with domestic corpor-
ations. From these decisions and other similar ones, it
seems the court attempted to establish the principle that
a state can levy a tax upon property engaged in interstate
commerce so long as their is no hostile discrimination
against such property. It would seem, however, that
property which belongs exclusively to interstate com-
merce cannot be taxed by the state.
The system thus far devised did not prove satisfac-
tory. The corporations relied more upon evasion than
upon the courts in their attempts to escape the tax. Banks
made such excuses as, even though they furnished the
money, they did no business that it was carried on by
their agent. In other cases they claimed that they used
no money. Some refused because they were neither cor-
porations,companies nor joint stock associations "creat-
ed" under laws other than those of New York, but were
formed under "common law" in their native state. Others
refused to comply with the law on the ground that they
were either partnerships or individuals. These and other
excuses which the minds of the legal advisors could con-
coct were given, instead of making the reports and paying
the tax. The law proved to be practically a dead letter
since in 1889 only five banks paid any tax. A large num-
ber were reaping profits from the state, yet were bearing
no share of the public burdens. Each successive report
of the comptroller pointed out the evasions and difficulties
and asked for modification, but it was not until 1894 that
29 People vs Wemple, 138 N. Y., 1.
68 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the legislature attempted to give relief.
In that year a law was passed 30 which purposed to deal
with the difficulties in regard to the foreign banks. It
provided that every foreign banker doing a business in
the state was liable for the payment of an annual tax of
one-half of one per cent on the amount of business done
in the state during the year ending December thirty-first.
The amount of business which was carried on was to be
computed by finding the daily average for each month,
of the moneys received, used, or employed in connection
with the business. The aggregate of such monthly aver-
ages was to be divided by the number of months in the
year. Each bank was to make a report as to the amount
of business and tax due to the state on or before Febru-
ary first. In the case of failure to do this, or if the report
was not satisfactory, the comptroller was authorized to
examine the books and records of the bank for the pur-
pose of determining the tax. A penalty of ten per cent
of the tax was imposed when there was a failure to make
the report. It further required the institutions to keep
the financial accounts of the business so that they could
be examined by the comptroller at any time. All taxes
and penalties ,in cases of failure to pay, were to be recov-
ered by action brought by the Attorney-General. Here
we see that the determination of the tax was not left en-
tirely to the banks, but power is given to state officials
to investigate and verify reports. This is perhaps the
most marked advance over previous legislation.
In 1895 a license tax corresponding to the domestic
organization tax of one eighth of one per cent was plac-
ed upon all foreign corporations (except banks and in-
surance companies) doing business in the state. 31 The
amount of capital employed during the first year was to
be the basis of the tax. In T896 33 the law in regard to
" New York Statutes, 1894, Chap. 196.
" New York Statutes, 1895, Chap. 240.
* New York Statutes, 1896, Chap. 908. The difficulty had still re-
mained of bankers claiming they did not come under the law. This
law explicitly pointed out that the term foreign banker was to in-
clude (1) every foreign corporation doing a banking business in
THE TAXATION OF FOREIGN CORPORATIONS 69
foreign bankers was so amended as to set forth in detail
just who came under the provisions of the act. By an act
passed in i892 34 the capital of any insurance company,
incorporated under the laws of any state or country out-
side of New York, to the extent employed in business in
the state was to be subject to taxation the same as the
capital of a like domestic insurance company. Such
taxation was to take place where its principal office was
located. By this same law all foreign insurance compan-
ies, life, health, marine doing business in the state,
were to pay two per cent of all premiums received.
The license fee of one eighth of one per cent brought
results which were immediately noticeable. The law, in
reality, did not go into effect until the first of December,
yet the tax received for the month was over $1300. Four
companies which had been organized without the state,
yet did practically all the business here, immediately re-
organized under New York laws. Not only did the law
produce a license tax, but it greatly increased the organi-
zation tax since the inducement of a low organization tax
which other states held out was no longer a gain to a
company which had most of its business in New York.
The total organization tax received by the. state in 1895
was $258,464 while in 1896 it amounted to $503,951.
The Comptroller, in his reports for 1895 and i896 35 was
very enthusiastic concerning the good effects of the
license fee. In the second of these reports he pointed out
that in addition to the increase from licenses, the state
had received a large increase of the capital stock tax.
This was because many corporations, which would other-
wise have escaped notice, were brought to 'the attention
of the department through the payment of the license.
These modifications in the laws caused an increased
the state except national banks; (2) every unincorporated associa-
tion of two or more individuals organized under the laws of another
state or country; (3) every association of two or more individuals,
if the members owning more than half of the interest or entitled
to more than half of the profits were non-residents ; (4) every non-
resident doing a banking business in his own name.
M New York Statutes, 1892, Chap. 690.
w Annual Reports, New York State Comptroller, 1895 and 1896.
70 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
amount of litigation. A few cases will serve to illustrate
the nature of the questions which arose. Some domestic
corporations sought to evade taxation by consigning their
property to agents. The lower courts held that such
property was not exempt but was taxable to the
agent. The Court of Appeals held that, such property
was taxable, but that it should be assessed to the
corporation at the place where it was located. 36 Difficul-
ties arose in placing a value upon the capital of foreign
corporations for the purpose of taxation. In such evalua-
tions the court held 37 that the par value of the stock was
to be used as the proper basis.
The questions as to what effect the good will, debts
and surplus of foreign corporations had upon their valu-
ation were left for the courts to decide. Where the good
will enjoyed by one firm was transferred to a corpora-
tion organized to continue and take over the business,
such good will was an asset and was to be considered in
determining the amount of capital employed in the state.
In fixing the amount of the capital the same proportion
of the value of the entire good will was to be taken as the
amount of the tangible capital employed by the corpor-
ation in the state bore to the entire amount of tangible
capital 38 Copyrights granted by the government, how-
ever, were held to be without the taxing power of the
state. 39 Some companies had purchased property in the
state and had not made full cash payments for it. When
such purchases were made, so held the court. 40 and the
company paid cash for a part and promised to pay the
balance in the future, or paid no cash but promised to
pay in the future, the amount still due upon the property
was to be deducted from the value of the property in or-
der to ascertain the "sum invested" in the state upon
which the law held them taxable. In case all the corpor-
ate property and business of a foreign company were in
M Boardman vs Supervisors, 22 Hun, 231 ; 85 N. Y., 359.
17 Elliott-Fisher Company vs Lohmer, 206 N. Y., 10.
M Koecht and Company vs Morgan, 183 N. Y., 359.
39 Johnson Company vs Roberts, 159 N. Y., 70.
"People vs Barker, 147 N. Y., 31.
THE TAXATION OF FOREIGN CORPORATIONS 71
the state, the corporation was entitled to have the amounts
of its debts deducted from the amount of capital employ-
ed in the state. 42
The question of dealing with the surplus arose in sev-
eral cases. A West Virginia advertising company was
incorporated for $5000 but was employing $40,000 in
New York. The comptroller fixed the basis of the tax at
$40,000. The court ruled that no matter how great the
aggregate property of a corporation was, the "capital
stock" the basis of the tax could not exceed the
amount authorized by the charter. The company might
employ surplus and not increase capital stock, and the
surplus not be subject to taxation. 43 At another time the
court held that surplus earnings of a foreign company,
carrying on a portion of its business in the state, which
were invested in real estate, could not be taxed. 44
The attitude of the court in the McLean case has made
it difficult to collect taxes from foreign companies. No
action it held, could be taken against the person so there
is left ony the recourse of proceeding against the property.
That such has been ineffective is shown by the fact that
from 1901 to 1913 the annual tax collected for non-resi-
dents in New York city decreased nearly fifty per cent. 45
These laws, as thus interpreted, constitute essentially
the present system of taxing foreign corporations. We
have the general law covering all classes, and special leg-
islation in the case of banks and insurance companies.
A little consideration of the above interpretations will
convince one that they provide the way for the escape of
much capital which the law intended to tax. That a large
amount of evasion was being practiced was pointed out by
the Comptroller in his report for i895. 46 He had been
convinced by a little tentative work that several thousand
taxable foreign corporations employing a whole or a por-
tion of their capital in the state, were not yet upon the
Journeay vs Roberts, 27 Supreme Court, App. Div., 1.
48 Advertising Company vs Roberts, 151 N. Y., 621.
"People vs Wemple, 150 N. Y., 46.
"City of New York vs McLean, 170 N. Y., 374.
"Annual Report of New York State Comptroller, 1895.
72 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
comptroller's books. Many had failed to secure a certifi-
cate authorizing them to do business in the state, and such
could only be discovered by personal examination. The
license tax to some extent alleviated the difficulty but by
no means eliminated it.
The exemption of the surplus paved the way for as
much evasion of the tax as any other feature of the sys-
tem. Corporations are not slow to claim that the money
employed in the state is surplus and that the real capital
is invested outside of the state. They claim that they
are exempt from taxation because they have more surplus
than the amount used in New York. A New York citi-
zen might incorporate in another state for $5000 and by
issuing bonds or establishing a so-called surplus, practic-
ally escape taxation. It was an incentive to undercapi-
talization for by such organization a surplus was automat-
ically created. Numerous suggestions for reform were
made.
In his report for iSgS, 47 after pointing out the condi-
tions, the State Comptroller made the suggestion that
they should cease trying to tax the capital stock created
by the laws of another state. He considered it would be
better to assess an annual tax upon the right to do busi-
ness in the state. He suggested, as the measure of this
taxation, such part of the authorized capital stock of the
foreign corporation as its tangible assets in New York
state bore to its entire tangible assets. He even went so
far as to incorporate these recommendations in a bill
which he had introduced into both houses of the legis-
lature. It was aimed at the practice of corporations go-
ing to another state and incorporating for perhaps several
million dollars while their entire business in New York
was carried on with only a few thousand dollars in capital
stock. The bill did no pass, and the Governors' mes-
sages's 48 and comptroller's reports continued to point out
41 Annual Report New York State Comptroller, 1898, Assembly
Documents, 1898, Vol. 1, No. 3.
"Governor Odell, in his message to the legislature in 1902 (Sen-
ate Documents, 1902, Vol. 1, No. 2.) pointed out that certain com-
panies had taken the amount of their corporation holdings in the
state and incorporated under the same name and with the same
THE TAXATION OF FOREIGN CORPORATIONS 73
the inequalities and ask for reform. Not only were the
state officials dissatisfied, but the special tax commission
which reported in igoo 49 decried the conditions and asked
for reform. In I9o6 50 the legislature passed a bill which
was practically the suggestion made by the comptroller in
1898. This remedied the evil of having a large capitaliza-
ton without the state and only a small amount employed
in New York, even though a large amount of the busi-
ness were done here. It did not, however, remedy the
evil of exempting the invested surplus from taxation. A
company with a small capitalization might still have
a large amount of assests, and yet escape with a compar-
atively light tax.
The law 51 which exempts from taxation such compan-
ies as are employing at least forty per cent of their capi-
tal in manufacturing has been taken advantage of by for-
eign corporations. They organize small companies under
New York laws, such organizations often having the >ame
name as the foreign corporation with the words "of New
York" added. The foreign company owns all of the share
stock of the domestic company, and it frequently happens
that the domestic company pays no dividends. The net
returns find their way back to the parent foreign corpora-
tion. The provision which exempts the goods of a for-
eign corporation from tax if the proceeds from the sale
are transmitted to the home office, no doubt often works
as a discrimination against domestic producers. A for-
eign company can fill a warehouse with goods and keep
them as long as it desires without paying a tax, while a
officers as designated in the incorporation in other states. This al-
lowed them to evade taxes for which they would otherwise be lia-
ble. He suggested that no corporation be allowed to form with the
same name as that borne by a corporation of another state. Gover-
nor Higgins (Senate Documents, 1906, Vol. 1, No. 1) contended
that a corporation organized eleswhere to do business in the state
and which was a foreign corporation in name only, thereby obtain-
ed an unfair advantage over the legitimate domestic corporation
which incorporated under New York laws.
49 Report of Special Tax Commission, Senate Documents, 1900,
Vol. 1. No. 7.
M New York Statutes, 1906, Chap. 474.
81 New York Statutes, 1901, Chap. 558.
74 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
domestic company under similar conditions would be tax-
ed. By a law passed in icjoo 52 every foreign banker is
required to pay a tax of five per cent on the amount of
interest or compensation of any kind earned and collected
by him on money loaned, used, or employed in the state.
In dealing with foreign corporations, two conflicting
policies have been followed. One has been that foreign
capital should be attracted in order to develop large indus-
try within the state. The other tendency has been to pro-
tect domestic capital. While each of these proposals has
its advocates, it would seem better not to discriminate be-
tween the two classes of capital, but to treat all capital
within the state under the same conditions, on an equal
basis. Only by doing this can it be insured so far as tax-
ation is concerned, at least, that competition will be up-
on an equal basis. Whatever be the method in use, then,
for taxing the domestic corporations, the same should
be applied to the foreign. Much has been said about im-
posing greater burdens upon foreign corporations than
upon foreign individuals doing business in the state. The
individuals pay a tax upon the property but do not have
to pay the license and franchise taxes. But this question
no more applies to foreign corporations than to corpora-
tions in general. If it be decided that the corporate form
gives advantages which enable it to pay higher taxes
than the individual, then the foreign corporation should
bear them as well as the domestic.
If we had a uniform system of taxing corporations for
all the states, then our problems of driving out or at-
tracting capital would be minimized. But since we have
such varied systems, the states should endeavor to treat all
concerns doing business within their borders upon an
equal basis. There would be at least some tendency to
uniformity, for the states which imposed harsh burdens
upon their corporations would not only keep foreign capi-
tal from coming to them, but would tend to force domes-
tic capital outside their borders. As long as New York
uses the franchise tax upon capital stock as the basis for
taxing a large part of its corporations, this also should
" New York Statutes, 1900, Chap. 500
THE TAXATION OF FOREIGN CORPORATIONS 75
be used in the case of the foreign corporations. We have
seen that the amount of capital stock in the state was con-
sidered as that proportion of the whole capital stock which
the assets in the state bore to the total assets. We also
saw that this was largely evaded by a small capitalization
and the use of surplus in the state, which the courts have
held could not be taxed. Such evasions should be mini-
mized. One way in which this could be accomplished
would be to change the basis of comparison. Perhaps as
fair a way as any under the existing circumstances would
be to consider both the capital stock and surplus as "capi-
tal stock" for the basis of the tax. And so long as classi-
fications of capital stock are made according to the
amount of dividends paid, more or less confusion will
result. We have pointed out in another chapter the difi-
culties which this provision occasions. Under the present
scheme of apportionment, equality is not always obtained
because the dividends accrue only partially from business
done within the state. The amount of business which a
foreign company carries on within the state bears no
constant ratio to the amount of its assets found here.
Hence taxation which takes for its basis the capital stock,
classified according to the amount of dividends paid, and
in proportion to the amount of assets found within the
state, is not fair.
Then, too, the provision exempting goods from taxa-
tion which are sent here to agents should be modified.
As the home producer is made to pay tax upon the goods
he has in stock, it is unfair discrimination to exempt the
foreign goods. The assessors should be allowed to as-
sess such consignments on the same basis as they assess
other goods.
Since for the present at least, we are to use the capital
stock as the basis of the tax, the question arises as to the
best way of determining the amount "employed" in the
state. Can we find a more equitable basis than that of
assets? A little investigation convinces us that the entire
assets of some foreign corporations consist of an office
in New York City. Yet it by no means follows that this
represents the importance of New York to the company.
76 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
For psychological, economic, or geographic reasons the
entire business of the company may be carried on through
this office. As much of it may be with New York citi-
zens or foreign countries as if it were a domestic company.
Because such company has no assets in the state should
it escape taxation ? We think not. Perhaps it would not
be far amiss to take, instead of the assets, the amount of
business transacted within the state as the proper propor-
tion of the company's capital to be taxed. Surely the
amount of business represents more the contribution of
New York to their ability to pay taxes than does the
amount of assets found within the state. The amount of
business carried on could be determined from reports
from the corporations subject to investigation by the
state officials.
The method just outlined would be preferable to an
income tax which has been advocated by many. Such a
tax would be satisfactory and just, no doubt, if income
were taken as the basis of taxation for domestic compan-
ies as well. But if we take a percentage of the income
from foreign companies while we tax domestic compan-
ies on their capital stock, we would be taxing companies
carrying on a similar business upon different bases and
could not hope to realize the desired equality. If the state
should adopt some other method than the capital stock
basis for its domestic corporations, then we could apply
the same to the foreign companies. Whatever the meth-
ods in use, however, it should be applied to both in order
that as near an equality as possible be attained. 53
53 The Joint Legislative Committee on Taxation, which made a
report to the legislature February 19, 1916, pointed out the need
for changing the method of taxing foreign corporations. The evils
of the present system were enumerated but no remedies suggested.
The part of the report dealing with foreign corporations closes :
"From every point of view, whether from that of the cost of the
service, the benefit derived or the ability to pay, the answer is clear :
foreign corporations should contribute liberally to the support of
New York State government."
CHAPTER V.
TAXATION OF INSURANCE COMPANIES AND MANU-
FACTURING CORPORATIONS
In the preceding chapter we noticed that foreign in-
surance companies were subject to special taxes in New
York. This was not at first true of domestic companies
which were taxed on their capital stock under the general
tax laws of 1823 and 1828. In 1824 the legislature gave
a few specified insurance companies the privilege of pay-
ing to the treasurer of the county in which they did busi-
ness ten per cent upon all dividends, profits, or incomes
in lieu of the tax on capital stock. 1 The variable nature
of the capital stock of insurance companies proved to be a
source of difficulty in applying the tax. The matter was
brought to the attention of the legislature by the Renssel-
aer Insurance Company. On June 20, 1820 it had a capi-
tal stock of $199,880.90, but a cinflagration loss reduced
it to $87,536.45. In 1821 it was increased to $101,-
781.89, but it was still assessed on the amount before the
loss. The legislature, upon receiving the company's peti-
ion, enacted that the sum last named above should be tak-
en as its capital stock until additions were made to
it. The general insurance law of 1849 m ^de provision
for uniform reports as to the amount of capital stock and
other financial details but made no change in taxation.
The rise of mutual companies created a new problem
for the legislature and the courts. Such companies sought
to escape taxation because they were not formed under
the general law neither had they "capital stock." At-
tempts to assess capital stock to them led to litigation. The
Buffalo Mutual Insurance Company had a fund of $100,-
ooo invested in securities, the income from which went to
'New York Statutes, 1824, Chap. 321.
77
78 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the policy holders. The company had no other invested
capital yet this fund could not be withdrawn or divided.
It was virtually a trust fund for the policy holders. The
court held that the company was a moneyed or stock cor-
poration deriving an income and was liable to taxation
upon such a fund as caiptal 2 The Sun Mutual Company
had been accumulating a surplus from premiums paid
in by members as a fund from which to meet the losses
and expenses that might arise during its existence. Cer-
tificates were issued to the members, which stated their in-
terest in the surplus fund. The court held that wherever
a mutual insurance company accumulated from its profits
a fund to continue liable for its losses during the term
of its existence, and issued certificates to members stating
their interest therein, such accumulation became capital.
The certificates were not evidence of debt but represent-
ed the interest of the members in the capital, and such a
company was liable to taxation upon the capital so accum-
ulated. 2 A number of other cases that raised virtually the
same issues were decided in the same way. 3 The legisla-
ture finally cleared these issues by first declaring that the
3 Buffalo Mutual Insurance Company vs Supervisors, 4 Comstock,
443.
2 Sun Mutual Insurance Company vs City of New York, 8 N. Y.,
241.
8 The fees exacted from insurance companies for the performance
of certain transactions have varied at different times. In 1853 one
law (Chap. 463) provided for fees payable by life and health com-
panies while another (Chap. 466) imposed similar requirements on
fire insurance companies. A declaration was to be filed in the office
of the comptroller, setting forth intentions to form a company, for
which a fee of twenty dollars was to be collected. For depositing
their certified charter and securities foreign companies were assess-
ed a like fee. For every paper filed by the county clerk, he was to
charge ten cents. Under the act which established the state insur-
ance department in 1850 (Chap. 366) the fees were increased. Thirty
dollars were assessed for filing the declaration or certified charter ;
twenty dollars for filing the annual statement ; three dollars for
every certificate of agency ; one dollar for filing each folio of paper
in the office. The fees were to meet the expense of maintaining
the insurance department. In case they should fail to do this, the
deficiency was to be assessed annually pro rata upon all stock in-
surance companies of the state. In 1868 (Chap. 732) the fee for
filing the annual statement by all marine and life insurance com-
panies was fixed at fifty dollars.
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 79
mutual companies were taxable 4 and later by taxing them
on an arbitrary sum of $100,000 personal property and
no more. 5
For many years, then, insurance companies had been
taxed like other corporations, and there is very little indi-
cation that it was thought they should be taxed otherwise.
Evidence of the growth of a new opinion, however, is
found in an editorial of the New York Times in 1879:
Insurance companies require distinct treatment. Rules applicable
to other corporations are inapplicable to these or to any corporation
whose operations invilve the exercise of thrift or prudence on the
part of the public. Fire and marine insurance companies maintain
indeed, certain general resemblances to other forms of business and
are not likely to be injured by the taxation of their capital and of
so much of their accumulations as may be found in real estate.
Life insurance stands upon a different footing. ... So many
of the companies as possess stock capital can be taxed on that item
and all of them properly be taxed on the basis of surplus. To the
extent of the reserve requied for the fulfillment of a company's
obligations to its policy holders, the assets are a trust fund which it
were criminal to touch. The surplus ,though, in a mutual company,
belonging to the policy holders may be assessed without danger or
injustice ; in a stock company where more or less of it may be claim-
ed by holders of stock which never rendered service, the surplus not
only may but should be taxed as vigorously as the inflated stock of
a railroad company. 8
Further evidence of dissatisfaction with the situation
is found in the report of the State Assessors for 1874.
The taxes paid by insurance companies they said were
almost negligible as compared with their capital and their
business. Comparatively few made the returns required
by the tax law. 7 Again in 1880 the assessors suggested
that although the surplus of mutual insurance companies
is likely to be largely invested in United States securities
which cannot be taxed directly, yet it is within the power
of the legislature to use the amount of the surplus as the
measure of a franchise tax. The taxation of such com-
panies, they held, should not be repressive, for the busi-
ness of insurance should not be discouraged. They
4 New York Statutes, 1853, Chap. 469.
8 New York Statutes, 1855, Chap. 83.
8 New York Times, Apr. 8, 1879.
'Annual Report New York State Assessors, Senate Documents,
74, Vol. 1, No. 23.
80 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
thought it no more than fair, however, that the compan-
ies should pay something to the state which created and
protected them. They suggested a tax of one per cent
or three-fourths of one per cent upon so much of the sur-
plus as exceeded one year's income. The measure of a
year's income was to be the average income of the five
years preceding. 8
In 1880 the legislature passed an act 9 taxing life insur-
ance companies. This placed an annual tax upon the
franchise or business of every life insurance company in-
corporated under the laws of the state. The tax was to
be paid before February i and was to be one per cent up-
on the gross amount of premiums, interest, and other in-
come, exclusive of rents, received by the company during
the year ending with the preceding December 31, from
persons residing in the state or from investments repre-
sented by or based upon property situated within the state.
Land and real estate were to be assessed locally, but the
personalty and stock was to bear no tax. At the same
sitting of the legislature, similar provision was made for
other forms of insurance companies. 10 Each of these
companies was to pay a tax of four-fifths of one per cent
upon the gross amount of premiums. This was not at
first specified as a franchise tax, but the next year the leg-
islature so defined it. 11
The tax on life insurance companies did not prove pro-
ductive. Although it was not repealed until i887 12 it
'Annual Report New York State Assessors, Senate Documents,
1880, Vol. 1, No. 26.
"New York Statutes, 1880, Chap. 534. Every company was to
make a sworn statement to the state treasurer giving the total
amount of premiums, interest or other income as was the basis of
the tax. The refusal or neglect to make the report was declared a
misdemeanor, and any one who wilfully made a false statement was
to be subject to the penalties of perjury. Unpaid taxes were to be
collected by action of the attorney general and the Supreme Court
was given the power to restrain business through an injunction un-
til the taxes were paid. In the case of other companies ten per cent
was to be added to the tax if the report was not made within thirty
days of the specified time.
10 New York Statutes, 1880, Chap. 542.
"New York Statutes, 1881, Chap. 361.
" New York Statutes, 1887, Chap. 699.
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 81
was ineffective, because it lacked a provision stating its
purpose. In 1886 the Court of appeals held 13 that the
constitutional provision prohibiting a tax unless its pur-
pose were specially stated did not apply to special taxes.
This made the law valid and the companies liable for all
the taxes which had accrued under it. The Comptroller
asked for a law which would require a payment of only
a part of the taxes due under the law of i88o 14 but the
law of 1887 repealing this also released the companies
from liability for these back taxes. Hence life insurance
companies were paying practically nothing directly to the
state during this period.
Some modifications were made in 1886 in the taxation
of fire and marine insurance companies. 15 They were
required to make annual instead of semi-annual returns
and the tax, which was expressly stated to be a tax upon
corporate franchise or business, was to be one-half of one
per cent of the gross amount of premiums received dur-
ing the year. In I9O5 16 this was raised to one per cent
on the amount of premiums and life insurance compan-
ies were put upon the same basis. By this law foreign
and domestic companies are treated alike except for fees
and retaliatory taxes. 17 Alien companies, however, are
required to pay only one half of one per cent upon prem-
iums.
When insurance companies were taxed like other cor-
porations it was often difficult to determine just what was
to be considered as capital and surplus. A large amount
of litigation developed, and in almost every case the de-
cisions of the court followed the contentions of the state.
A fire insurance company sought to escape taxation on
the amount of money received for unexpired fire policies.
"Cited as authority, People vs Supervisors, 17 N. Y., 239.
"Annual Report of State Comptroller, Senate Documents, 1887.
No. 48.
15 New York Statutes, 1886, Chap. 679.
M New York Statutes, 1905, Chap. 94.
17 Retalitory taxes aim to get even with other states imposing:
taxes on New York insurance companies. The law states that New
York will impose as high taxes on the companies of any state doing
business within the state as are imposed against New York com-
panies in that state.
82 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
The court held, 18 however, that so much of this as was
in excess of a sum sufficient to cover the contingent lia-
bility of the company was to be counted as surplus. One
company sought to evade taxation by issuing scrip to the
policy holders and retaining the fund. The court held
that this was properly included in the assessment of the
company. 19 Neither would the court sanction the idea
that the surrender value of policies constituted a debt
which should be deducted, 20 or that the shares should be
assessed at the rate at which they sold in the open market
during the year. 21 A number of other cases came up but
410.
these suffice to show the way in which the nature of the
business of insurance enhanced the difficulties of reaching
a proper assessment. The consensus of the court decis-
ions was that all the assets of the company over and above
the contingent liabilities were to be taken as the proper
basis for assessment. So far as clearness and ease of ad-
ministration are concerned, the present system is much
better.
To what extent insurance companies, and life insur-
ance companies, in particular, should be taxed or whether
they should be taxed at all, are questions upon which
there is great variance of opinion. 22 New York legisla-
tors have pursued a more lenient course than has often
been advocated. It is often contended that insurance
companies should be taxed only very lightly, if at all,
since the burden falls upon the policy holder. When a
tax is placed upon a fire insurance company it must mean,
in general, a higher premium, to the insured and in many
cases a still further shifting until the incidence is upon
"Insurance Company vs Commissioner of Taxes, 76 N. Y., 64.
19 American Fire Insurance vs Commissioner of Taxes, 91 N. Y.,
670.
* Insurance Company vs Davenport, 91 N. Y., 574.
" Knickerbocker Fire Insurance Company vs Coleman, 44 Hun,
n For discussion of insurance taxation see : State and Local
Taxation, 1907, 1909 ; paper by F. L. Hoffman, National Conference
on Taxation, Buffalo, 1901 ; Yale Readings in Life Insurance by
Zartman; Life Insurance and Other Subjects by Dryden; Reports
of special tax commissions of various states, especially Virginia,
Nebraska, and Wisconsin, give discussions on insurance taxation.
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 83
the consumer in the form of higher prices for the goods
that he buys. Much the same objections are made to
taxes upon life insurance companies. Life insurance, it
is contended, is an institution which makes for the public
welfare, and the decrease of the burdens of government
in providing for many people who might otherwise be
dependents. This general point of view has been well
expressed by the Independent. 2 *
A tax on any interest of any life insurance policy holder is in-
defensive. It closely approximates a tribute laid upon a cemetery
lot. To the vast majority of men a life insurance premium is a
sacrifice ; in varying degrees it represents extra effort or self-denial
It is a burdent upon which the unwisdom of legislation lays another
burden. This mistake is due to ignorance to a confusion of ideas.
Men are often misled by names, missing the nature of the things
the names represent. It is fairly probable that life insurance ac-
cumulations would be exempted from taxation if from the begin-
ning they had been called burial funds or widows and orphans or
old age pension funds. That is exactly what they are. There is
prevalent, even among policy holders, an erroneous idea respecting
the nature of the vast accumulations held by the combined com-
panies. They carelessly look upon them as vast accumulations of
surplus wealth. This comes from the fact that they are concen-
trated and the amount is exceedingly large, and yet in the usual
meaning of the terms they are neither wealth nor surplus. They
are every dollar of them, expense funds, small contributions of hard
earned money saved up against the time when the universal enemy
shall desolate the households of the contributors. Not a penny of
the money dedicated to such use should be seized by the government.
This is not wholly an inaccurate picture of the nature of
the life insurance business. Yet it is greatly exaggerated.
By no means are all premiums paid by those to whom
such payment is a heavy burden nor is it always done for
"burial funds." This is true at best only of industrial
insurance. Many persons use the insurance policy as an
investment or savings device upon which the reflected
tax in an increased premium would not be a material bur-
den. 24
The opponents of life insurance taxation follow the
line of argument that has been indicated. The beneficent
"Independent, May 8, 1913, Vol. 74.
31 That a tax is shifted to the policy holder is generally recognized.
It is a cost of insurance. In participating companies it is reflected
in lower dividends while in non-participating companies the prem-
iums are higher than they would otherwise need to be.
84 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
features of the system are extolled; the provision for
widows and orphans is emphasized ;the burden lifted from
the state in the care of dependents is magnified. Life in-
surance is pictured as a provision for the future an in-
centive to providence and thrift. The assets of the com-
panies are but the accumulated savings of the policy hold-
ers. A tax upon life insurance, then, they claim, is a tax
upon savings, a penalty upon thrift and falls where it is
particularly burdensome. This is not merely unjust but
it has the further ill effect of diminishing the volume of
life insurance.
If we carry this argument to its logical conclusion it
would condemn a large part of the present general sys-
tem of taxation. "Taxes upon life insurance are upon
thrift and savings." But the general property tax is pre-
cisely such a tax. Men make provision for the future by
accumulating savings and capital and are penalized for
doing this by a tax. One may put his savings into a
house, another may take out an insurance policy. It is
hard to see enough difference between the two classes to
afford a basis for discrimination between them in the
matter of taxation. A tax upon insurance is not a
unique tax; it is logically a part of the general scheme
which we have adopted. The contentions of its oppon-
ents, carried their logical conclusion, would leave as the
basis for our taxes only those social values which have
no connection with individual savings. In regard to this
tax upon savings and thrift, Professor T. S. Adams says :
It is perfectly true that a tax on insurance paid by the policy
holder tends to discourage thrift. But that is not in itself sufficient
reason for abolishing such taxes. In the first place, our tax system
similorly discourages thrift at many points ; savings banks are taxed
in most states ; and the small homesteads in which wage-earners and
salaried clerks invest their savings are more heavily taxed in all
probability than any other class of property except the estates of
widowed and orphaned children in the process of administration and
settlement. In fact, our whole system of state taxation, falling prin-
cipally on realized or accumulated wealth, is a huge engine for the
taxation of savings and capital the two principal means by whicTi
thrifty people provide against future emergencies. An insurance
is merely a method of co-operative saving with an ingenious provis-
ion that if any co-operator is prevented by death from continuing
his saving, the more fortunate surivors shall do a stipulated amount
of saving for him. Furthermore, this system of taxing savings,
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 85
and accumulated wealth has been delberately adopted and will not
be abandoned. The civilized nations of the world have committed
themseles to the general policy of levying taxes, so far as possible,
in proportion to ability, not disability; according to strength, not
weakness; and as the thrifty man is usually the able and strong
man, he will continue to pay most of the taxes The sim-
ple truth is that no instrument of social reform is in general more
ineffective, more disappointing or more illusory than taxation.
Every tax has some incident or collaterial social effect. This truth
furnishes sufficient reason perhaps, why we should temper or shade
the general rule here or there. But it proides no justification for
the essential modification of the general rule. 25
Another objection to life insurance taxation is voiced
in the old cry of "double taxation." The assets of the
insurance companies are securities mere evidences of
ownership. The property which they represent is already
taxed to the corporaton which issued them and should
not be taxed to the insurance company. We have noted
elsewhere that "double taxation" is not in itself neces-
sarily an evil, but is only such when it leads to an unjust
distribution of the aggregate burden of taxation.
Whether securities as a whole should be exempt from
taxation is one question ; how we are going to tax insur-
ance companies, if at all, under the existing system of tax-
ation is quite a different queston. The majority of states
have not seen fit to exempt from taxation, securities in
the hands of individuals. There seems to be no reason
for exempting a company which makes similar invest-
ments. In fact it merely acts as middleman for the in-
vestor. It seems rather absurb to say to a man, "If you
invest $5000 in bonds we will tax you upon it, but if you
let the insurance company invest it for you we will not
tax you." If a remedy is needed here it is not in insur-
ance taxation but in the general scheme.
Even if we grant that life insurance should be fostered
by minimizing the burdens placed upon it, we cannot go
so far as to justify an entire exemption from payments
to the state. If life insurance companies are to serve their
purpose, their solvency must at all times be absolutely
assured. Experience has shown that this necessitates
thorough-going state regulation. New York has main-
25 Address before the fourth annual meeting of the Association
of Life Insurance Presidents, Chicago, 1910.
86 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
tained an insurance department for this purpose since
1857. Such a department, however, should go further
than merely to certify that companies are solvent. It
should guarantee that the premiums charged are no high-
er than are reasonably necessary to properly carry on the
business. When the state certifies to the solvency of a
company and the reasonableness of its premiums, it is
performing a special service for particular individuals
the policy holders and their beneficiaries and it is but
just that they should bear the expense.
Taking into account both the nature of insurance busi-
ness and our present system of taxation, we cannot grant
the contention that the treatment of life insurance com-
panies should be especially lenient. The problem is to
hit upon some from of taxation which will be equitable
as between insurance and other forms of investment. The
difficulties are increased because of the fact that individ-
ual companies do business in so many different states and
because of the various forms of insurance companies.
The length of time a company has been in existence is
another factor which must be considered. We must also
avoid eroneous premises upon which arguments for the
taxation of insurance companies are sometimes based.
Premiums are sometimes called "income," which is no
more accurate than to call the deposits in a bank its in-
come. Then it is often thought that the "dividends" to
policy holders are a measure of the profitableness of an
insurance business. These are not comparable to divi-
dends paid by an ordinary business corporation to its
stockholders, but are merely a return of part of the prem-
ium, which, for the sake of absolute safety, has been larg-
er than really necessary.
The "cash surrender value" feature of most modern
insurance policies would in itself seem to make them a
legitimate part of the basis of the present system of tax-
es. Like a bank deposit, this is a demand right to money.
The fact that the surrender value is less than the aggre-
gate amount of premiums paid in makes no essential dif-
ference. The risk that the company has carried has been
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 87
paid for by the difference between the surrender value
and the premiums paid.
The tax which is now most generally used by the states
is a percentage tax upon gross premiums. In New York
it is one per cent, which is lower than in most states. Be-
cause of its general use and the firm grasp of some sort
of taxation upon insurance companies, some insurance
officials have asked that the one per cent rate upon prem-
iums be made the uniform rate everywhere.
The premium tax is, however, open to some valid ob-
jections. Professor Zartmah has urged 27 that such a tax
discriminates among policy holders of different states,
among holders of different kinds of policies, and among
policy holders and other tax payers. The first discrimina-
tion results from the premiums employed; the second,
from different premiums paid on different kinds of poli-
cies; and the third form from the fact that the rate on
premiums does not fluctuate with the rate on other prop-
erty. Because of these difficulties Professor Zartman
would give up the premium basis. Any increase in the
premium to meet a new tax would work injustice upon
future policy holders. The present policy holder has
contracted for a fixed premium, and it is only the new
policy holder who can be made to pay the tax. This is
particularly applicable to stock companies, for in partici-
pating companies the tax could be met from reduced
dividends. This objection, of course, is not peculiar to
insurance taxation but applies equally to many sorts of
"new taxes." While the premium tax does work these
discriminations, yet it is easily assessed and collected and
unless some more just scheme be devised it should not be
thrown aside.
No scheme has been devised which mets the theoret-
ical and practical tests of justice. The regulatory ex-
penses can be met by fees and shifted to the policy hold-
ers through higher premiums. If New York's personal
property tax were other than farcical, a system might
be worked out on the basis of the equity of the policy
"Address before the second annual meeting of Life Insurance
Presidents, New York, 1908.
88 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
holder represented by the cash surrender value. Should
the state adopt an income basis for taxes, it would be
comparatively easy to secure franchise taxes by assessing
the company's income. The federal tax law has decided
what shall constitute the income of insurance companies,
and this basis could be used for state purposes. Here
the large investments of older companies representing the
equity of a large number of paid up policies would con-
tinue to be taxed, while under the present system the
heavier burdens fall upon the newer companies. Under
a general income tax, dividends paid to policy holders
and the amount received by the beneficiary in excess of
premiums paid could be taxed to the recipient as a part
of his income. So long as the present general tax system
remains, however, the tax on premiums may serve as well
as any other.
TAXATION OF MANUFACTURING CORPORATIONS 28
We have seen that in 1817 the policy of using the tax sys-
tem to encourage manufacturing interests in the state was
adopted. In some form or other this policy has been pretty
generally followed although not to the full extent that
its advocates have urged. This was shown, for example,
in the agitation for tax reform in the seventies. The
New York Times held that the exemption of personal
property from taxation in England, France, and Holland
was an encouragement to industry in those countries.
In this country Maine and Vermont exempted manufac-
turing capital from taxation. Most of the states, howev-
er, New York included, burdened industry with local
taxes. This was held to be a disadvantage in competi-
tion with foreign producers. 29 In his proposals for tax
reform presented before the committee of ways and
means, October 6, 1874, Mr. George H. Andrews pro-
posed to exempt the shares of all maufacturing corpor-
28 There is no logical reason except that of convenience why in-
surance companies and manufacturing corporations should be treat-
ed in the same chapter. The only point of similarity is that both
are exempt from the franchise tax on capital.
New York Times, Feb. 17, 1871. Editorial.
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 89
ations carrying on manufacturing within the state. If
for no other reason, he says, the fact that such is the prac-
tice in some other states would be sufficient.
In the revision of the tax laws in i88o, 30 "manufac-
turing companies carrying on manufacturing in the state"
were exempted from the annual franchise tax. In con-
struing this provision the courts held 31 that it was not
limited to companies organized under the general manu-
facturing act, but included all companies under whatever
law incorporated, whose principal business was manu-
facturing. The law was applicable to foreign as well as
domestic corporations, but where a foreign company only
did some incidental work in connection with its manufac-
tured products sent here to fit them for the market it could
not claim exemption from taxation under the law. 32 The
obvious difficulty in regard to companies only a part of
whose capital was employed in manufacturing was reme-
died by the law of iSSQ. 33 This limited the exemption
to corporations whose business in New York was exclu-
sively manufacturing. If a company was not wholly en-
gaged in manufacturing but was also engaged in selling
in a city within the state goods manufactured by it out
of the state and also of selling articles not of its own man-
ufacture, it was subject to the tax. 34 It still remained
difficult, however, to determine in particular cases wheth-
er a company was engaged in "manufacturing."
At the request of the Comptroller 35 the law was amend-
ed in i896 36 so as to exempt that part of the capital
of domestic and foreign manufacturing corporations
which was employed in manufacturing, thus putting for-
eign and domestic companies on an equal footing. It
did not however remove the difficulty in deciding what
the term "manufacturing" included. Companies engag-
80 New York Statutes, 1880, Chap. 242.
81 Gas Light Company vs Brooklyn, 89 N. Y., 409.
"People vs Wemple, 138 N. Y., 582.
88 New York Statutes, 1889, Chap. 353.
84 Western Electric Company vs Campbell, 145 N. Y., 587.
85 Annual Report of New York State Comptroller, 18%.
M New York Statutes, 1896, Chap. 908.
90 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ed in both manufacturing and merchandising were ex-
empt from tax upon the amount of capital employed in
the former use but not in the latter. How were the offi-
cials to decide how much was invested in each? The
court opinions were apparently conflicting. A law of
1 90 1, 37 however, makes it necessary that at least forty
per cent of the capital stock of corporations be invested in
property within the state and be used by it in manufactur-
ing business if the company is to be exempt from the an-
nual franchise tax on capital stock. A similar provision
applies to mining and laundry companies. This simpli-
fies the administrative problem by introducing an arbi-
trary rule. So long as the organization tax was one-
eighth of one per cent a large number of manufacturing
companies \vhose entire business was in New York were
chartered in other states. In 1900, the Comptroller re-
ported that 450 such corporations had been formed during
the preceding year under the laws of a sister state. The ag-
gregate capitalization of these companies was $250,000,-
ooo. 38
Even though manufacturing capital be exempt from
the annual franchise tax it is still assessable locally under
the law of 1857, providing for taxation of property.
When we say that the local officials assess this, we have
said enough to condemn the system. If uniformity is
needed in any class of taxation it is in the class of manu-
facturing concerns since theirs is a competitive business,
and the tax may mean the margin which will spell suc-
cess or failure. Then we have all come to know that capi-
tal stock, even if it could be properly assessed, does not
represent the value of a business. Some companies are
doing a large business on a comparatively small issue of
37 New York Statutes, 1901, Chap. 558.
M Annual Report of New York State Comptroller, 1900. A large
amount of condemnation has continually arisen from state officials
and the press concerning "driving capital out of the state." In this
particular case the capital was employed entirely within the state
which, after all, is the important item. Had it not been manufac-
turing capital, it would have been taxed. Whether "driving capital
from the state," when the industry or business is located here, means
anything from the standpoint of taxation depends upon the similar-
ity of the laws taxing foreign and domestic companies.
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 91
capital stock while in others the capital stock may be to
a large extent "water." The latter is especially true in
large combinations. There are approximately sixteen
hundred assessing districts in the state, and there is no
uniform role to insure equitable assessments of such prop-
erty. Even if absolute honesty existed among the assess-
ors the magnitude and complexity of the problem would
forbid its accomplishment. The officials, however, have
often been accused of deliberate discriminations. It has
been contended that in some cases capital has been driven
away or invited to localities because the assessors either
enforced or did not enforce the law. We are well aware
that districts often offer incentives to industries, such as
tree factory sites, etc., and it is not unreasonable to suppose
that when they have it within their power, they try to
offer advantages in respect to taxation. It is certain that
in the local assessment of manufacturing corporations
gross inequality still exists.
There is no good reason why manufacturing companies
should not bear their share of the public burden. No
longer can they be generally considered as infant indus-
tries that need the fostering hand of the state. The men
who put their capital into such industries have no more
claim to exemption than those in other enterprises. The
argument that the tax is shifted to the consumer in higher
prices is no more applicable here than in the case of many
other taxes. The problem of taxing manufacturing com-
panies is the problem of taxing capital in general in a
just and equitable manner. The system should be such
that there will be no discrimination in favor of particular
fields of business endeavor. Because of the nature of the
manufacturing business and the extended market for
manufactured products, uniformity should not be confin-
ed to the limits of any one state but should be extended,
so far as possible, to the whole competitive district.
It has been recently contended that the New York sys-
tem of taxation tends to drive capital from the state or
at least offers little inducement for it to enter. In resolu-
ions adopted March 30, 1910 by the Rochester Conference
on Taxation figures were cited to show that, from 1900
92 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
to 1910, capital invested in manufacturing in New York
had increased much more slowly than in Pennsylvania.
The proportionate increase of the value of manufactured
goods, wage earners and the amount of horsepower de-
veloped were similar. The conclusions, however, were
based upon census statistics, the accuracy of which may be
questioned. The resolutions asked that a committee be
formed to further legislation to relieve manufacturing
companies. In 1910 the New York Board of Trade and
Transportation asked that something be done to remedy
the situation. In his message of 1912 Governor Dix ex-
pressed his regrets that New York was losing her place
as a manufacturing state because of the burdens of tax-
ation. He asked for reform and suggested the federal
income tax method as worth considering. 39
Differences in the tax system of New York and other
states may have had some influence in determining the
growth of manufactures. It is certain, however, that too
much importance has been attached to this idea. There
are many other and more important factors in the situa-
tion. Only under the rare conditions that the other influ-
ences are practically negligible will taxation be a deter-
mining factor. If there were a more rapid growth of
manufacturing in Pennsylvania it can doubtless be ascrib-
ed to other influences than taxation.
Different methods of taxing this class of corporations
have been suggested. Some have asked for a uniform
rate upon capital stock graduated by the amount of divi-
dends paid. In 1910 a bill to impose a tax of one-eighth
of a mill upon the issued capital stock for each one per
cent of dividends paid was reported favorably in the Sen-
ate but failed to pass. The main objection was that the
dividends would be covered up by high salaries in closed
corporations and in others by creating a surplus. Even
if this difficulty could be eliminated by charging salaries
over a certain amount, together with annual surplus ac-
cruals, to dividends,, such a tax would not always be
" Message of Governor Dix, Assembly Documents, 1912, Vol 1,
No. 2. The income tax to which he referred has been absorbed by
the general federal income tax.
INSURANCE COMPANIES AND MANUFACTURING CORPORATIONS 93
equitable because of differences in capitalization policies.
The problems of taxing manufacturing corporations is
but a part of the problem of securing a just and equitable
general tax system. There are no longer, if there ever
were, reasons why manufacturing corporations should
constitute a special class for purposes of taxation. The
scheme that may be chosen as just and equitable for cap-
ital in general should include capital engaged in manu-
facturing enterprises.
CHAP T ER VI.
TAXATION OF BANKS
In New York, as elsewhere, the taxation of banks by
the state has been complicated because of the require-
ments of federal statutes. On this account a large num-
ber of important bank cases have been before the courts.
Bank stock was subject to taxation under the provisions
of the first special statute relating to the taxation of
corporations. 1 Bank officers were required to give to the
assessors a statement of real estate, capital stock paid in
or secured to be paid in, and the assessors were to put
the amount of such real and personal property upon their
rolls. The cashier or treasurer was to pay the tax and
deduct the amount from the dividends of stockholders in
proportion to the amount of stock held by them. As in
the case of other corporations, none was to be deducted
from dividends due to the state or to charitable institu-
tions. Any complaints which arose were taken directly
to the legislature.
Thus, in 1828 the Commercial Bank of Albany applied
to the legislature to have its assessments of $300,000 re-
duced to $150,000. This request was granted. 2 The
safety fund system was adopted in 1829, and under this
it was necessary that all bank capital be fully paid in.
Banks were then taxed upon the amount of their capital
( except so much as was held by the state or charitable
institutions). The tax was upon its nominal value, even
though, of course, its shares might be above or below
that value. 3
1 New York Statutes, 1823, Chap. 262.
' New York Statutes, 1828, Chap. 50.
1 So held in Bank of Utica vs City of Utica, 4 Paige, 399.
94
THE TAXATION OF BANKS 95
The banking act of i838 4 did not state whether banks
were to be considered corporations. It remained for the
courts to decide that the institutions established under the
act were corporations, and that they were liable to be tax-
ed like other moneyed institutions. 5 Some individuals
continued to escape on the ground that they were not cor-
porations. In 1847 tne legislature remedied this by pro-
viding that all individuals doing a banking business
should be subject to tax on the full amount of capital
stock. The tax was to be upon the actual market value
as estimated by the comptroller, without deduction for
the debts of such banker.
In 1 85 1 7 the banking department was established, the
expense of which was to be paid by the incorporated
banks in such proportion as the superintendent thought
just and reasonable. If, however, any special services
were performed for a bank, the expense was to be borne
by the bank for which the service was rendered.
In his report to the legislature in i853 8 the Comp-
troller pointed out that the bank surplus was practically
the same as capital, and asked that it be taxed in the same
way. In that year the general corporation tax law 9 was
passed which made surplus profits or reserve funds in
excess of ten per .cent of the capitl subject to taxation.
Since the banking associations were corporations, their
surplus, in excess of ten per cent of the capital, was tax-
able. In 1863, moreover, a law was put upon the statute
books which expressly mentioned banks and banking as-
sociations as subject to this tax. 10
The most radical change in the taxation of banks came
in 1865. This was necessary in order to conform to the
* New York Statutes, 1838, Chap. 260.
6 Thomas vs Dakin, 22 Wendell, 9 and Bank of Watertown vs
Assessors, 25 Wendell, 686.
New York Statutes, 1847, Chap. 419.
7 New York Statutes, 1851, Chap. 164.
8 Annual Report State Comptroller, 1853.
New York Statutes, 1853, Chap. 654.
"New York Statutes, 1863, Chap. 240.
96 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
National Banking Act of i864, n which imposed limita-
tions upon the powers of states to tax national banks.
The New York statute of i865 12 was a general law,
enabling banks to become associations for the purpose of
banking under the laws of the United States. With re-
spect to taxation 13 it provided that shares in any of the
banking associations organized under the act or the fed-
eral statute were to be included in the valuation of the
personal property of the owner, and assessed in the town
or ward where the banking association was located.
Moreover, it was to be assessed at no greater rate than
other moneyed capital in the hands of individuals. The
tax was not to exceed the par value of the stock, while
the real estate of the bank was to be subject to local tax-
ation. Unless the taxes were otherwise paid, the bank-
was to withhold them from dividends.
Under such provisions, then, national banks began to
be taxed. Their shares were assessed and taxed to the
individual owners while the capital and surplus of the
state banks were assessed to the bank. The first impor-
tant question which arose was whether bank capital in-
vested in United States securities should be deducted
from the assessment. This was the issue in a number of
11 U. S. Statutes at Large, 1864, Chap. 106. It provided, (section
41), that nothing in the act was to be construed to prevent all the
shares in any of the said associations [National Banks], held by any
person or body corporate, from being included in the valuation of
the personal property of such person or corporation in the assess-
ment of taxes imposed by any state authority at the place where the
bank was located. Such assessment and tax was not to be at a
greater rate than was assessed upon other moneyed capital in the
hands of individual citizens of such state. It was further provided
that the tax so imposed under the laws of any state upon the shares
of any of the associations authorized by the act was not to exceed
the rate imposed upon any of the shares in any of the banks or-
ganized under authority of the state where such association was
located. It further provided that nothing in the act was to exempt
the real estate of such associations from either state, county or
municipal taxes to the same extent, according to value, as other
real estate was taxed.
12 New York Statutes, 1865, Chap. 97.
13 Sections 10 and 11 of the above law.
THE TAXATION OF BANKS 97
cases which came before the courts. 14 and the decisions
were always against the banks. The point was finally
settled by the United States Supreme Court in a case car-
ried from the Court of Appeals. 15 The finding was that
shares of banking associations formed by the act of 1864
were subject to taxation by states without regard to the
fact that a part or a whole of the capital was invesed in
national securities. Chief Justice Chase with two other
justices dissented, however, in the following language :
"We think such taxation is actual, though indirect tax-
ation of the bonds; and that taxation of the shares of
national banking associations without reference to the
amount of capital invested in national securities, is not
authorized by congress."
These same justices dissented in the case of Dyer vs
Commissioner of Taxes. Here the shareholder object-
14 The case of the City of Utica vs Churchhill (43 Barbour, 550)
was one of the first to come before the courts. The court held that
a tax on the stockholder for the stock held by him was a proper
and legitimate source for state and municipal taxation. A tax upon
the stockholder was not to be considered a tax upon the bank nor
on its property, but upon property held and owned by the stockhold-
ers and in which the bank had no interest. In this case the court
held that the laws of the state and not the laws of congress were
to furnish the guide by which to decide whether the stocks of
national banks can be taxed, and the place and manner of taxing
them. The basis for this was that national bank shares were per-
sonal property and therefore assessable under New York laws. The
court did not think they could be assessed in a ward where the bank
was located when residence was elsewhere. In the next session
the court took the opposite view (People vs Assessors, 44 Barbour,
148) ) by holding that congress had the power to modify the taxa-
tion of national bank shares, and provide under what circumstances
it should be execised. The amount of the stock invested in United
States securities was not to be deducted. When carried to the Court
of Appeals this view was upheld.
15 Van Allen vs Assessors, 33 N. Y., 161, 70 U. S., 573. In the
case of Bank of Commerce vs Commissioner of Taxes (69 U. S.,
200) appealed from the Court of Appeals (26 N. Y., 163) the court
held that a tax laid by a state on banks on a valuation equal to the
amount of the capital stock paid in or secured to be paid in, was a
tax on the property of the institution. When that property con-
sisted of stocks of the Federal Government, the law laying the tax
was void. The only difference in the two cases was that one was
the assessment upon the capital to the bank, and the other the as-
sessment upon shares to the owner.
"4 Wall., 244.
98 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ed to the tax because insurance companies were assessed
at a much lower rate, or, what amounted to the same
thing, were assessed only on the part of capital stock left
after deduction of the amount invested in. United States
bonds. The dissenting opinion held that a similar de-
duction should be made in the case of bank shares. The
majority of the court held, however, that the clause in
question did not refer to the rate of assessment upon in-
surance companies as a test by which to prevent discrim-
ination against the shares; that is, one criterion was the
rate of assessment upon moneyed capital in the hands of
individuals. 17
While in the Van Allen case the contention of the
state courts was upheld, the law of 1865 was, neverthe-
less, declared unconstitutional. This was upon the
ground that it did not provide that the tax imposed
should not exceed the rate imposed upon any bank or-
ganized by the state. There was no tax laid on bank
shares though there was a tax on capital.
This led to the passage of the act of April 23, i866, 18
which provided that thereafter no tax should be assesse-
ed upon the capital of any bank, but that stockholders
should be assessed and taxed on the value of their shares.
Otherwise the act was much like its predecessor. While
this produced no change in the actual results, it met the
technical requirements. In making the assessment there
was to be deducted from the value of each share such a
sum as was in the same proportion to its value as was the
assessed value of the real estate to the whole value of the
stock outstanding. Each banker was required to give
under oath the amount of the capital invested in the bus-
iness. The bank had to keep at all times in its office a
full and correct list of names and residences of all the
stockholders together with the number of shares held by
each. Such lists were to be open to inspection during
business hours.
17 It was not until later that the interpretation of "moneyed capi-
tal in the hands of individuals" came before the court. See page
110 for this case.
"New York Statutes, 1866, Chap. 761.
THE TAXATION OF BANKS 99
Such were the provisions of the law under which banks
were to be taxed for the next several years. As the
courts had held that investments in United States secur-
ities could not be deducted, so they now further held that
debts could not be deducted. 19 In giving this opinion the
court said with regard to the law of 1866 : "These un-
usual provisions and directions concur with the previous
legislation in indicating the the statuatory intent to estab-
lish for bank shares a system of taxation peculiar to it-
self and independent of the general system of taxation
existent in the state." Upon the point of taxing the value
of shares it said : "It is as if they had said, we cannot
now tax the national banks as we have been accustomed
to do but instead thereof we will tax their share-
holders and we will apply to them the system of taxation
that we have hitherto imposed upon the banks, so far as
it is lawful so to do."
Here, then, we have the special system of taxation de-
signed for the banks, and the interpretations made by
the courts. The shares were to be assessed to the holders
but at the place where the bank was located. Such as-
sessment, however, was not to be at a higher rate than
upon other moneyed capital in the hands of individuals.
The amount of the stock invested in United States secur-
ities and debts could not be deducted. We shall now
examine how the policy was received by the banks and
the general public, and what were the general effects.
The decisions of the courts which we have just noted
were doubtless a surprise to many. Before the cases came
before the court, the New York Times 20 pointed out that
the comptroller was making the singular experiment of
assessing national bank capital at a higher rate than local
bank capital. In doing this it suggested that he was ply-
ing directly in the face of the National Banking Act
and of course could not succeed. Letters from E. G.
Spaulding, drafter of the National Currency Bank Bill
18 Coggcr vs Dolan, 36 N. Y, 59.
"New York Times, July 15, 1865.
100 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
and the Legal Tender Act, 21 and Freeman Clark, Comp-
troller of the National Currency were quoted at length
in support of the view taken. Mr. Spaulding concluded
that the shareholders of a national bank which has a part
of its capital invested in United States securities were
only liable to be taxed on the amount of their share in
the capital stock remaining after the amount invested
in such securities was deducted. If all the capital were
so invested he thought the stockholder could not be tax-
ed at all. A lengthy legal opinion by Ward Hunt, print-
ed by the same journal, 22 concluded: "Upon a careful
consideration of the provision of the statutes, state and
national, regulating the shares in national banks for the
purpose of taxation, I am of the opinion that such valua-
tion is to be ascertained by taking their actual value sub-
ject to a reduction from the shares of each individual of
a proportionable amount of the capital invested in United
States securities." Taking these views as representative
of a probably large body of opinion, we see that the find-
ings of the courts must have been in some measure unex-
pected. 23
21 Mr. E. G. Spaulding was chairman of the Senate sub-committee
which drafted the bill providing for the National Currency and the
Sub. Treasury Act. Because of his influence in connection with the
latter he has been called the "Father of the Greenbacks."
22 New York Times, Aug. 3, 1865.
23 These were the first bank cases which came before the Supreme
Court. The first case deciding upon bond investments (69 U. S.,
200) arose from the passing of the law of 1863 (Chap. 240). Un-
der the law of 1857 the tax was upon the capital stock assessed at
actual value. Here the court held that the amount invested in se-
curities must be deducted. (2 Black, 220) The law of 1863 made
the tax upon a Valuation equal to the amount of capital stock paid
in or secured to be paid in. The court reasoned that a tax on such
valuation was a tax on the property of the bank, and when that prop-
erty consisted of stocks of the Federal government the tax was
void. The other case came under the new law. (70 U. S., 573)
Here the court argued that a tax on shares was not a tax on gov-
ernment securities because the tax was the condition for the new
rights and privileges conferred upon the associations. If Congress
had the power to grant these then it was equally clear that it had
power to annex conditions. The tax was not upon securities, but
upon the rights and privileges conferred by the charter. Neither
was the tax one upon the capital of the bank. The corporation was
the legal owner of the property and could deal with the corporate
THE TAXATION OF BANK3
The law required that the shares be assessed at their
actual value, and the court held 24 that stock assessed at
par value when the market or actual value was more than
this was erroneously assessed. Yet there were great ir-
regularities in the assessment of the bank shares. Not
only were these taxed differently from other property,
but the ratio of assessed to true value varied greatly for
different banks. The Comptroller, in his report for 1873,
pointed out that the rule of "actual value" assessment
was almost everywhere violated. No uniform practice
was formed and the valuation was frequently at from
twenty-five to eighty-five per cent of par value. 25 Only
a small proportion of the capital of private banks was as-
sessed, the explanation usually given being that their cap-
ital was invested in government bonds.
The state assessors also condemned these inequalities.
Not only were the assessments at variance with the act-
ual values, but many different rates of taxes were im-
posed. Two or three different rates in the same county
were not unusual. Negligence of the taxing officials some-
times went further than this. For example, a bank in
one of the western counties with a capital of $200,000
went for several years without being taxed at all, and was
finally assessed at one-third of par value. 26
Even if bank shares had been assessed according to
law, inequality would still have existed as compared with
other kinds of personal property. Since they were as-
sessed where the bank was located, and the taxes collect-
property as absolutely as a private individual could deal with his own.
In no legal sense were the individual members the owners of the
corporate property though they might be interested in it. In the
decision dealing with the deduction of debts, (36 N. Y., 59) the
reasoning dealt with the legislative interest. It was pointed out that
in all previous laws banks were taxed without reference to the con-
dition of the share owners. Where debts were intended to be de-
ducted the laws specifically so stated. It was the legislative intent to
tax banks under a different system from that of the general tax
law, and the legislature did not intend that debts should be deducted.
** People vs Assessors, 5 Thompson and Cook, 155.
" Annual Report of New York State Comptroller, 1873.
"Annual Report of New York State Assessors, Senate Docu-
ments, 1874, Vol. 2, No. 23.
102 ..DEVELOPMENT O* CORPORATION TAXATION, STATE OF NEW YORK
ed at the source, it was difficult for bank shares to easily
escape taxation. Neither was it possible for banks arbi-
trarily to designate as their "principal office" a locality
where the taxing officials were especially lenient. It was
the old question of the evasion of the personal property
tax. Since much of the personal property was being
assessed at a very small fraction of its "full and actual
value," those banks which were heavily taxed had what
seems a right to complain. Besides being thus taxed up-
on capital the banks were taxed upon their whole surplus,
which was not true in the case of other corporations.
Governor Robinson condemned this practice as unsound
since it induced the banks to divide their surplus among
the stockholders thereby diminishing the security which
it gave to the public so long as held by the bank. 27
Such a system could not be without its bad affects.
Among the banks of New York City the reduction of cap-
ital was a common practice, and along with this went the
reduction of surplus. The report of the Commissioner of
Taxes and Assessments of New York City for 1877 showed
that the variation in the assessments upon the stockholders
of banks was responsible for the failure of one bank with
a capital of $100,000, the abandonment of business by
two banks with capitals of $600,000 each, the reduction
of capital by six banks to the extent of $3,950,000, and
the establishment of one bank with a capital of $100,000.
There had also been a large reduction of surplus on the
part of several banks by distribution or by losses in bus-
iness, pointed out the report. In January, 1877, the Bank
of Commerce sent proxy forms to stockholders for the
purpose of obtaining authority to reduce the capital of
$10,000,000 to any amount not less than half of this un-
less some legislative change was made in regard to tax-
ation. This consent was given and the legislation was
not forthcoming.
The reduction of banking capital in New York City
within a year amounted to almost $10,000,000. The
taxes on the shareholders in the New York City banks
27 Governor Robinson's Message, 1877, Senate Documents, 1877,
Vol. 1, No. 2.
THE TAXATION OF BANKS 103
in 1876 were nearly $12,000,000 more than in 1875 while
the tax on their real estate amounted to over $10,000,000.
Under such conditions it is no wonder that capital would
be reduced and surplus distributed if this would bring re-
lief. It was possible to put the surplus where it could not
be so easily found by the assessors. Even under a reduc-
ed capital, if the profits remained as great as before, the
value of the share should increase. If, then, the shares
were taxed at their actual value, as was intended, a mere
reduction of capital would have little effect upon tax.
But the dividends and distributions of surplus were not
always reflected in the value of the shares. Besides,
there were wide discrepancies in the assessment and a re-
duction in capital often meant lower tax. It was hard
for an assessor to assess a bank with a capital of $50,000
as much as one with a capital of $500,000. The nature
of the banking business makes a large capital of no great
importance. If large deposits can be secured and exten-
sive credit given on a small capital and surplus, the profits
still remain. There is a disadvantage, however, to the
public in that the security of the bank is weakened.
In 1877 Mr. Elliott C. Cowdin championed a bill in
the Assembly for the relief of the banks. In a speech on
April n, 1877, he presented many facts which vividly
portrayed the alleged condition of the New York banks.
People are mistaken, he said, when they think national
banks are the pets of the federal government and should,
therefore, bear heavy taxes imposed by the state and mu-
nicipal governments. He quoted the federal comptroller
as declaring the tax upon national bank capital relative-
ly higher than upon any other capital in the country. Not
only must it bear state taxation, but a national tax as
well. 28 The average rate of taxation on the capital of
all the national banks of the state was slightly less than
three per cent. A comparison of a few cities follows:
28 National Banks by the law of 1863 were required to pay three
kinds of taxes to the federal government: (1) one per cent an-
nually upon the average amount of notes in circulation; (2) one
half of one per cent upon deposits ; (3) they were required to keep
a reserve of 25 per cent in city banks and 15 per cent in country
banks. They could not use the reserve yet were taxed upon it.
104 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
New York, 3.1 per cent; Philadelphia, .5 per cent; Wash-
ington, .3 per cent. Including federal taxes the rate in
New York City went to 5.1 per cent while in Abany and
Syracuse it was more than 6.5 per cent. Money was
being loaned on call at this period at about three per cent
while notes were discounted at from four to six per cent.
A study of the values of personal property on the assess-
ment rolls in New York city shows the national banks
to be almost forty per cent of the whole.
The speaker commented upon the difficulties of meet-
ing the competition of foreign bankers who did not have
to pay the tax, and upon the evils of reducing capital
and surplus. The bill before the legislature sought to
secure a more uniform taxation of banking capital as
compared with other forms of capital. It met defeat,
however, on April 26 by one vote. The opposition came
chiefly from the rural districts. The New York Times 2
sought to excuse the rural legislator by saying the "he
probably does not understand in the sense of realizing
comprehension the severity and injustice of the present
taxation ; he is accustomed to the complaint of inequality,
and expects as a matter of course, that every class and
every interest will endeavor to escape being taxed."
Thus the system remained unchanged and the agita-
tion against it continued. Comptrollers, state assessors,
bank superintendents, and the press all condemned it.
The assessors criticized the "vengeance" with which
national banks were taxed, and expressed doubts as to
wether any capital could bear such an enormous burden.
The national banks were paying thirty per cent of all the
taxes upon personal property. 30 The Superintendent of
Banks, in his reports for 1878 and i879 31 was no ^ ess bit-
ter. He emphasized that the banks were taxed upon what
they had and upon what they did not have; upon what
they owned and upon what they owed.
" Editorial, New York Times, April 23, 1877.
81 Annual Report New York State Assessors, 1879. Senate Docu-
ments, 1879, Vol. 2, No. 28.
M Annual Report Superintendent of Banks, Assembly Documents
1878, Vol. 1, No. 5; 1879, Vol. 1. No. 5.
THE TAXATION OF BANKS 105
The tax was a war tax, he said, and it should not be
continued. As an evidence of the difficulties which sur-
rounded the banking business, he pointed to the number
of banks which had either gone out of business, reduced
capital, or suspended dividends. When an excessive tax
is being placed upon bank shares it does not fall upon
the richest and strongest capitalists, for a large propor-
tion of bank shares are held by minors, estates, etc.
When banks are excessively taxed, therefore, these
classes must bear more than their share of taxation. The
State Assessors showed that there were three companies
within the state which, if taxed as national banks were
taxed, would pay all of the state tax. Such taxation,
however, would be considered an outrage upon the rights
of property and relief would no doubt be given by the
courts. 32
That all this dissatisfaction was not merely a clamor
stirred up by the banking interests and that real hard-
ships were imposed upon the banking business, seems
clear. It had not been the practice of the state comp-
trollers, the state assessors or the bank superintendents
unjustly to champion the cause of corporations. More
frequently have they recommended measures which would
bring more revenue to the state. But we find all these
officers decrying the injustice to banks and the consequent
evil effects upon business and industry.
Branches of foreign banks could flourish and prosper
besides the struggling national banks. But as soon as a
bill passed both branches of the legislature to tax foreign
banking capital to the same extent that domestic banks
were taxed, the representatives of the Canadian banks
immediately held a conference and took measures to with-
draw their capital. This would have taken some thirty
or forty million dollars from the loan market and the
commercial public became so aroused and exerted such
an influence that the bill was vetoed. Even such a lesson
as this did not awaken the legislators to the situation with
respect to home capital. That the capital and surplus in-
" Annual Report New York State Assessors, Senate Documents,
1880, Vol. 1, No. 26.
106 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
\ested in the banking business in New York state, especi-
ally in New York city, actually decreased, and that this
was not true of banking capital elsewhere is evident from a
study of the Pennsylvania banks of the same period. The
accompanying graphs make this clear. The capital of
73 77 gi 85 89 <?3 97 ot o* o? 13
THE TAXATION OF BANKS
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the New York city national banks was nearly $75,000,000
in 1865, while in 1885 ^ na d fallen to $45,000,000 and
by 1899 had not reached $50,000,000. The national
banks of the whole state show a similar tendency. The
amount of $113,000,000 was invested in banking capital
in 1865, about $83,000,000 in 1885, and about the same
in 1899. It is evident, too, that the heaviest burden was
upon the banks of New York City, for the curve for the
national banks outside of the city shows an almost con-
stant amount of capital invested. That the national banks
were hit much harder than the other banks is also clear
for, with the exception of one period, there was not much
of a decrease in the capital of other banks, but rather a
108 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
gradual rise. In Pennsylvania there was a gradual in-
crease in national bank capital from $47,000,000 in 1865
to $62,000,000 in 1885 and $70,000,000 in 1889. This
latter amount was $5,000,000 less than for the two pre-
vious years. The other set of graphs shows that although
surplus was not reduced in similar proportion, yet there
was a period in New York when it diminshed. As a whole
the amount of the surplus in the two states was about the
same, although the percentage to capital was much less in
New York than in Pennsylvania. We may therefore
conclude that the banks were not unjustified in their con-
tention that relief was needed.
In 1879 a ray of hope came to the banks. A stock-
holder in the National Albany Exchange Bank made ap-
plication to have debts deducted. This was refused, the
state courts upholding the assessment. He carried the
case to the United States Supreme Court. 33 The court gave
the opinion that the provision in the law that taxation on
the shares of any national banking association should not
be at a greater rate than that on other moneyed capital
in the hands of individuals in the state, had reference to
the entire process of assessment and included the valua-
tion of the shares as well as the rate charged thereon.
The statute of a state, therefore, which established a mode
of assessment by which such shares were valued higher
in proportion to their real value than moneyed capital, was
in conflict with the law, even though no higher tax rate
was levied on such valuation than on that of other mon-
eyed capital. The statutes of New York, which permit-
ted one to deduct his just debts from the valuation of all
his peronal property, except as much as consisted of bank
shares, were therfore in conflict with the federal statute.
The significant point in the decision is that it held that
Congress had in mind the assessed valuation as well as
the so-called rate of taxation. The state courts had held
if the rate of taxation were uniform the law was not
violated.
This decision did away with that part of the interpre-
tation of the law of 1866 which prevented the deduction
" People vs Weaver, 100 U. S., 539.
THE TAXATION OF BANKS 109
of debts in the assessment of bank shares. In view of
this it seemed that it would henceforth be impracticable
to collect the tax as a whole at the source. The decis-
ion was hailed with delight by the banks. One of the New
York City tax commissioners expressed the opinion that
the tax paid by the New York City banks would be re-
duced by $1,550,000, which would necessitate an increas-
ed tax on real estate.
The next revision of the state tax on banks was a
direct consequence of this decision. The new statute, 34
enacted in 1880, was in general like the law of 1866,
except that it contained the additional phrase, "but in the
assessment each stockholder shall be allowed all the de-
ductions and exemptions allowed by law in assessing the
value of other taxable personal property owned by indi-
vidual citizens of the state."
The relief given by this law, however, was less than
had been expected. The law provided as before that state
and national banks should be assessed and taxed in the
same manner, but this did not provide improved assess-
ment machinery, and so did not insure fair and equitable
valuations. Even if there had been an exact uniformity
in the assessment of state and national banks, there would
not have been equality of burden, for the latter had also
to pay taxes to the federal government. There was some
agitation in 1880 to place a tax of one-half of one per
cent on the average deposits in state banks and a bill in-
tended to accomplish this was introduced into the legis-
lature, but nothing came of it.
No doubt banking capital continued to bear a higher
tax than other capital, because the assessors could easily
place it upon the assessment rolls, while much of the other
personal property could easily be hidden. Moreover, a
difficulty was encountered in the assessment of shares
where the bank was located. The banks sometimes re-
fused to pay the tax, and so impracticable was it to col-
lect taxes from non-residents, that in some places only
resident share holders were assessed. In different dis-
M New York Statutes, 1880, Chap. 596.
110 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
tricts the shares continued to be assessed at from forty to
one hundred and twenty per cent of par value.
The decision with regard to the deduction of debts en-
couraged the banks to bring a number of new cases be-
fore the courts. In the case of McMahon vs Palmer the
court held 35 that the exemption from taxation by state
law of some moneyed capital did not necessarily invali-
date a statute authorizing an assessment upon national
bank shares. The fact that some corporations and some
personal property were subject to a lower rate of taxa-
tion than that levied upon banks would not in itself vitiate
the law imposing taxes upon bank shares unless it appear-
ed to be the clear legislative intent to effect thereby dis-
crimination against them. Neither could a receiver bring
action to have an assessment reduced since none but the
share holders had any interest in the matter of taxation.
Unless they appeared before the commissioners at the
time specified in the law the action could not be subse-
quently reviewed by the courts. 36
Until this time the term ''moneyed capital" in the hands
of individuals," so frequently used by the statutes and
courts, had been only partially defined. It remained for
the United States Supreme Court 37 to do this in 1887,
and its opinion was anything but favorable for the con-
tentions of the bank. It held that the main purpose of
Congress in fixing limits to the state taxation of the
shares of national banks was to render it impossible for
the state to create and foster an unfriendly competition
by favoring institutions or individuals carrying on similar
business or operations and investments of a like character.
"Moneyed capital," then, embraced capital employed in
national banks and capital employed by individuals when
the object of their business was the making of profit by
the use of their moneyed capital as money as is in the
opinion of the court, a characteristic of banking. It did
not include, however, moneyed capital when in the hands
of a corporation, even if its business be such as to make
"McMahon vs Palmer, 102 N. Y. f 176; affirmed 133 U. S., 669.
M So held by the Court in People vs Wall Street Bank, 39 Hun, 525.
"Mercantile Bank vs New York, 121 U. S., 138.
THE TAXATION OF BANKS 111
its shares moneyed capital when in the hands of individ-
uals or if it invested its capital in secureties payable in
money.
It further held that the mode of taxation adopted by
the state of New York in reference to corporations, ex-
cluding trust companies and savings banks, did not oper-
ate in such a way as to tax the shares of national banks
at a higher rate than that imposed upon other moneyed
capital in the hands of individual citizens. Although
trust companies created under the laws of New York
were not banks in the commercial sense of the word, yet
the court held that the shares of such companies were
moneyed capital in the hands of individuals. Since, how-
ever, these companies were taxed upon the value of their
capital stock, with deductions on account of the property
in which their capital was invested, and were additionally
taxed upon their income through the franchise tax, the
court did not consider that the rate of taxation thus im-
posed was less than upon the shares in national banks.
Deposits in savings banks, it held, were exempted from
state taxation for just reasons, and as the exemption Jid
not operate as an unfriendly discrimination against in-
vestments in national bank shares it could not affect the
rule for the taxation of the latter.
Here we have set forth in no uncertain language the
status of bank shares. Only such stocks of corporations
and investments of capital as from the nature of the busi-
ness engaged in, competed with national banks, were to
be considered moneyed capital. Shares of trust compan-
ies were moneyed capital but there was no discrimination
in the fact that no tax was placed upon such shares. We
have noted that it was upon a similar point in regard to
state banks that the law of 1865 had been declared un-
constitutional. Capital invested in national bank stocV
was taxed upon its value less a deduction for real estate
and for debts (where this last could be effected,) but with
no deduction for amounts invested in United States se-
cureties. Capital in trust companies was taxed under the
old law of 1857, and the basis was capital not invested in
United States secureties or other non-taxable property.
1 12 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
That some sort of discrimination still existed is evident,
but the courts refused to recognize it as objectionable
under the existing laws, so the only thing left to the banks
was to move the legislature to action an accomplishment
which experience had proved to be no easy task.
For some time, however, the attempt to obtain relief
went no further than remonstrances. In a report to the
legislature in i893, 38 Messrs. Charles A. Collin and J.
Newton Fiero, counsel appointed to revise the tax laws,
pointed out that banks were complaining with apparent
justice that they were overtaxed as compared with other
corporations. They attributed this to the relatively effi-
cient machinery for bank taxation, and suggested a uni-
form method taxing all corporations. The New York
Financier, in igo6, 3Q told of the lack of uniformity in
bank taxation and its results. A letter from President
Perkins of the Bank of America to the stockholders, ex-
plaining a proposed reduction of capital, said: "The re-
duction is proposed because the bank is receiving very low
rates of interest, while it is paying in taxes a sum approx-
imating $80,000, of which about $30,000 can be saved
when the reduction of capital is carried into effect." Had
this bank been taxed in the same manner as trust com-
panies the dividends could have been from one to two
per cent higher.
The special tax commission of 1900 suggested a levy
of one per cent upon the stock of national banks, state
banks, and trust companies. The value of the shares was
to be ascertained by adding together the capital stock,
surplus and undivided profits and deducting the assessed
value of the real estate which continued to be assessed
locally. This, they thought, would eliminate the differ-
ences in the assessment of banking capital, and afford
substantial justice to all. 40 The Nation in commenting up-
on this report said that it suggested "so just and equitable
as well as so judicious and convenient a solution of
M Assembly Documents, 1893, Vol. 9, No. 54
"Quoted in Public Opnion, Dec. 31, 1896, Vol. 21.
** Report of Special Tax Commission, 1900, Senate Documents,
1900. Vol. 1, No. 7.
THE TAXATION OF BANKS 113
a perplexing problem that it ought to be accepted with-
out contest by banks and trust companies alike." 41 The
recommendation, however, brought no results at this ses-
sion of the legislature.
In 1901 Governor Odell in his message made practical-
ly the same recommendations. 42 The legislature took up
the question and at first attempted to enact a law placing
a franchise tax of one per cent upon all banks and trust
companies in addition to the taxes already borne. A gen-
eral protest arose, not only from bankers but from other
business men as well. This bill failed, but one was enact-
ed 43 embodying substantially the suggestions of the gov-
ernor and the special tax commission and which fixes the
present basis of bank taxation. Every bank has to make
a report to the assessors under penalty of $100 plus $10
for every day of delay. The assessment cannot be at
a greater rate than upon other moneyed capital. The
value of each share is to be fixed by adding together the
amount of the capital stock, surplus and undivided pro-
fits, and dividing the result by the number of outstanding
shares. The rate of the tax is one per cent upon the value
so determined. Shareholders are entitled to no deduction
from the taxable value of their shares because of their
personal indebtedness or any other reason. This is in
lieu of all other taxes for state, county or local purposes
except the local tax upon real estate. On or before De-
cember i of each year the assessors have to determine
the value of bank shares, and mail their findings to the
bank officer, a certified copy being sent to the county
treasurer. The bank collects the tax due upon its shares
paying it to the county treasurer within fifteen days after
it receives the statemen of assessment and tax. A pen-
alty of $100 is attached for every day of delay in pay-
ment. In 1903 it was enacted that the value of a share
for taxation of a bank in liquidation would be the actual
assets divided by the number of outstanding shares. 44
41 TheNation, Feb. 1, 1900. Vol. 70.
"Governor Odell, Message, Senate Documents, 1901, Vol. 1, No. 2.
"New York Statutes, 1901, Chap. 550.
44 New York Statutes, 1903, Chap. 267.
1 14 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
Such is the accomplishment after thirty-five years of
struggle and discussion. Since this system has been in-
augurated we have had little complaint and this has been
almost wholly from interests located without the state
owning shares in New York banks. Under the old
scheme they often escaped since the banks refused to pay
the tax and the non-resident stockholders could not be
reached by the officials. The court held that the statutes
could not impose a personal liability upon a non-resident
taxpayer, but could only make the property liable for the
tax. 45 The court also decided that no deductions for real
estate Were to be allowed and that this did not invalidate
the law. 46 Certainty, equality, and uniformity have in
a large measure been secured for all institutions doing a
banking business. The simple rule which is used in the
determination of the tax does away with the use of any
discretion on the part of the assessors, which is in itself
a commendable thing. While some have pointed out that
the tax on banking capital is lower than the tax upon oth-
er capital and have asked for an increase in the rate, and
others have advocated a lower rate, the system as a whole
has proved generally satisfactory. Few states have a
system for which so much can be said in its favor. 47
Some objections have been made because the value of
the real estate is not deducted when the assessment of
capital is made. It is claimed that real estate is thus twice
taxed. By carrying out the scheme as it is at present,
however, the administration is simpler. Besides it is not
45 City of New York vs McLean, 170 N. Y, 374.
"Matter of the First National Bank of Ossming, 182 N. Y, 460
47 The special tax commission of 1907 thought the rate was too
low. It was of the opinion that it should be increased to one and
one-half per cent, and that the assessed value of the real estate
should be deducted from the capital stock. It also recommended
that one-third of the tax should go to the state. Mr. Thos. B. Paton,
general counsel for the American Bankers' Association said before
the National Tax Association at Buffalo, 1913, that "there are a
few states in which the system of bank taxation is now satisfactory
from the banking standpoint, and among these is the state of New
York." The other states which he considers as having a satisfac-
tory system are New Jersey, Washington, and Indiana, while that
of Georgia, Minnesota, Iowa, and Illinois is only partially satisfac-
tory.
THE TAXATION OF BANKS 115
"double taxation" that necessarily works injustice; it is
rather the equity of the total tax burden that is important.
So long, then, as the rate on the capital is low enough
that it does no make the total tax excessive, no injustice
is done by not deducting the value of the real estate.
The rate at which capital invested in banks should be
taxed is a question which has been much discussed. Some
have advocated a high tax while others would exempt it
entirely. The one class looks upon banks as favored
creatures of the government, while the other looks upon
them as essential to business prosperity and seeks to es-
tablish them more extensively. While all sorts of produc-
tive capital might be more remunerative if untaxed, yet
the state must have revenue and capital must bear a part
of the burden. The nature of the business should of
course be given some weight in determining the tax
placed upon it. Some undesirable forms of enterprise we
tax severly as a limiting or prohibitory measure. Such
are the taxes upon the circulation of state bank notes, and
the numerous taxes and licenses placed upon the liquor
business. The earlier taxes placed upon New York
banks, at least in the way in which they operated, seem-
ed in their effect much like sumptuary taxes. If a cor-
porate franchise confers some valuable privileges, such
as monopoly, this may very often properly bear a higher
tax than one which gives no special privilege.
The banking business is not, however, of such a nature
as to suggest any clear reason why it should bear either
especially high or especially low taxes. The granting of
franchise to such institutions in no sense gives them a
monopoly, or increases their earning power. In fact the
use of the corporate form really increases the possibility
of competition, for persons of small means can become
shareholders. Moreover, banks render a necessary serv-
ice and are essential to business operations. By furnish-
ing credit when needed they help to develop productive
business enterprise and thus enlarge the basis of taxation.
If banks are unduly burdened banking facilities will be
correspondingly lessened. It can at least be held, there-
fore, that banks should not be taxed so much as appreci-
1 16 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ably to hinder capital from seeking that form of invest-
ment.
The taxation of bank deposits is another much discuss-
ed problem. Upon bank deposits is based the system by
which goods are in a large measure exchanged. A tax
that would seriously affect the amount of deposits, thus
affecting this form of bank credit, would no doubt be a
handicap to business transactions. Deposits, moreover,
as shown by the books of a bank, are liabilities which in
a large part merely offset loans or discounts on the other
side of the account, and are only in small part balanced
by cash. The real deposit in these cases is credit, and
this is secured because there is some asset in the hand of
the depositor which is presumably taxed under the prop-
erty tax. The same is true of the actual cash deposits
which, of course, are comparatively small in amount.
They are liabilities of the bank and assets of the depositor.
Under the present system they are presumably taxed to
the depositor. No doubt much of the deposits escape the
assessor, yet the same may be said for other classes of
personal property. ' The suggestion, however, that cash
deposits be taxed to the bank and the tax shifted to the de-
positor through a lower rate of interest is impracticable
since it is impossible to differentiate this kind of deposits.
The deposit system is not merely one of convenience, but
one which in a special way, it is argued, redounds favor-
ably to the bank. If liberal accommodation is to be ob-
tained by the borrower he is expected to keep a corres-
pondingly liberal deposit with the bank. This scheme of
finance permits the bank to charge a higher rate of inter-
est than what appears on the face of the transaction.
Suppose a firm nominally borrows $25,000 at seven per
cent but that only $20,000 are drawn out. In this case
the rate of interest on the actual loan would be nearly
nine per cent. By such transactions the profits of the
bank are no doubt increased. On the other hand, how-
ever, the whole of the bank's resources are not product-
ive. In order to carry on credit transactions a safe re-
serve must be kept and the minimum is often fixed by law.
Their gains, therefore, from credit transactions are to
THE TAXATION OF BANKS 117
some extent counterbalanced by the losses on their re-
serve. Because then of the nature and ownership of the
deposits, under the present sytem of taxation, there seems
to be little justification for taxing them to the bank in ad-
dition to the propery tax upon the owner.
TAXATION OF SAVINGS BANKS AND TRUST COMPANIES
The statuatory and case law with respect to the taxa-
tion of savings banks has had an entirely different his-
tory. By the provisions of the law of i857 48 the ex-
penses of the banking department, incurred because of
the supervision of savings banks, were to be borne by
them in proportion to the amount of deposits held. In
i867 49 this was changed so that each paid five dollars,
the residue of the expense being divided in proportion to
deposits.
In i866 50 the privileges and franchises granted by the
legislature of the state to savings banks and other insti-
tutions for savings were declared to be personal property
and liable to taxation. They were to be taxed in the
town or ward where they were located to an amount not
exceeding the gross sum of the surplus earned and in
possession of the institutions. The officers were to be ex-
amined under oath by the assessors as to the amount of
such surplus and the property was liable to seizure and sale
for the payment of taxes assessed for privileges and fran-
chises. A year later 52 a law provided that the gross sum
of surplus earned be diminished, for purposes of taxation,
by the amount of the surplus invested in United States
securities. The law of i857 53 declared that deposits in
savings banks were not taxable, except for the real estate
and stocks, which were owned by the bank. In i896 54
the "deposits in any bank for savings which were due to
the depositors," were declared exempt from taxation. In
48 New York Statutes, 1857, Chap. 136.
49 New York Statutes, 1867, Chap. 136.
50 New York Statutes, 1866, Chap. 761.
"New York Statutes, 1867, Chap. 861.
58 New York Statutes, 1857, Chap. 456.
54 New York Statutes, 1896, Chap. 117.
1 18 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
1901 an extra tax of one per cent on the par value of
their surplus and undivided earnings was assessed, 55 and
in 1914 every savings and loan association was classed
as an institution for savings, and neither they nor their
property was to be assessed under any law that exempted
savings banks. 56
The amendment of 1867 with regard to deductions of
surplus was evidently not due to judicial action. In the
same year a case involving the deduction of the amount
invested in United States secureties came before the
court. 57 The decision was, that where a tax is declared
upon franchises and privileges, it is not to be deemed
illegal because a corporation employs the bonds of the
United States as one of the means of accomplishing its
purposes. The tax was upon the franchise, and it was
unimportant what use the corporation made of it. More-
over, the state granted the franchise and could annex any
conditions to its enjoyment which it chose.
The court also laid down a rule for valuing the surplus
for the purpose of fixing the franchise tax. The Com-
troller must appraise the securities in which the surplus is
invested at market value when this is below par, and must
never appraise it above par even though the market value
may be above par. 58 The court also decided that when a
savings bank was being assessed upon shares of other
banks which it owned, both its debts and the amount in-
vested in United States securities should be deducted. 59
Although some difficulty has arisen in determining the
value of the surplus, the question which has overshadowed
all others in point of importance is whether deposits in
savings banks should be subject to any tax. In the earlier
period total exemption was pretty generally advocated.
"New York Statutes, 1901, Chap. 117.
M New York Statutes, 1914, Chap. 369.
67 Monroe County Savings Bank vs City of Rochester, 37 N. Y.,
JUD.
58 Bank for Savings vs Miller, 177 N. Y., 461. This rule is prac-
tically the same as laid down in the statute (1892, Chap. 689) for
determining the amount of surplus which a bank had. Its surplus
could not exceed 15 per cent of its deposits.
69 Bridgeport Savings Bank vs Barker, 154 N. Y., 128.
THE TAXATION OF BANKS 1 19
More recently, however, an increasing number of writers
on taxation are in favor of some form of taxation. The
position of deposits in savings banks differs from that of
deposits in commercial banks. Savings banks were es-
tablished for the small depositor for the one whose sav-
ings are small, and the kind of business done by the bank
is limited in many ways.
While the importance of savings banks accounts is di-
minishing, 60 and the average per depositor is small, the
total may aggregate many millions of dollars. Atttempts
to tax deposits have been met with the objection that this
is to tax the poor and industrious, the widows and or-
phans. While the average deposit is small, yet quite a
large number of wealthy men use the savings banks. The
maximum individual deposit is $3000, but this has been
evaded by the depositor using different banks or making
his deposits under different names. The special commis-
sion in I907 61 called attention to a case where, in admin-
istering an estate in one of the interior counties, the court
found deposits in every savings bank in the state between
and including Buffalo and Albany. In another case an
estate was appraised for the inheritance tax, and every
cent of the $65,000 was found in savings banks. It fur-
ther pointed out the large number of cases where de-
posits have been made under different modifications of
the same name and under the names of different members
of the same family. By these methods, then, the purpose
of the law, in fostering savings among the laboring class-
es and the poor, has been abused. For this reason the
taxation of savings accounts has been advocated.
The commission to which we have just referred
thought it best to make the maximum amount exempted
from tax $1000. This might result, it thought, in limit-
ing the deposits in any one bank by any one person to
$1000 and hence virtually exempt all deposits from taxa-
tion. Governor Dix, in his message of 1912, pointed out
*The decline in savings deposits can probably be accounted for
by the spread of investment intelligence among individuals together
with the increased ease of securing suitable securities.
w Senate Documents, 1907, Vol. 5, No. 11.
120 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the violation of the spirit of the law whereby millions of
dollars sought the savings banks as an investment; and
asked for some method of reaching this class of capital
which would not burden the small depositor.
It does not seem that fixing $1000 as a maximum tax-
exempt deposit would accomplish the desired end. If
persons use a number of banks and a number of different
names under which to make deposits when the exemption
is $3000 there is no reason to suppose that the practice
would be stopped with a $1000 maximum even though
it might be somewhat lessened. One would have to pat-
ronize a few more banks or use a few more names, with
evasion continuing much as before.
We would not penalize small savings, but it is doubtful
whether a moderate tax upon deposits would have this
effect. Even if it should mean a lower rate of interest,
it would work little hardship, since the tax would only
amount to one or two dollars and this would be the only
tax that many of the depositors would pay. The opposi-
tion to such a tax has probably not come in large measure
from the small depositor, but has been invoked in his
name by those who have used the banks for larger invest-
ment. The man whose motive is saving would not often be
induced to give it up because of a small tax. Because,
then, of the amount of deposits in the savings banks
($1,660,564,190.73 in 1912), the negligible burden upon
the small depositor and the development of the investment
feature, there can be little reason for opposing a small
tax upon savings bank deposits.
Trust companies have also been treated differently
from other banks. In i874 62 they were placed under the
banking department, and were to be assessd their proper
proportion of the expense of the department. By the law
of 1 90 1 63 every trust company organized or authorized
to do a trust business under general or special laws of the
state was to pay an annual tax for state purposes. This
tax is for the privilege of exercising its corporate fran-
chise or carrying on its business in an organized capacity.
"New York Statutes, 1874. Chap. 324.
"New York Statutes, 1901, Chap. 132.
THE TAXATION OF BANKS 121
The tax is one per cent on capital stock, surplus and un-
divided profits. This is in lieu of all other taxes, except
the organization tax and the owners of the shares are
not taxed upon them. Other banks are taxed in the same
way, but in the case of trust companies, there are no fed-
eral statutes to make confusion. Before this law was en-
acted trust companies were lightly taxed and banks com-
plained of the descrimination. Since they have been put
on the same basis the banks are satisfied, and there has
been very little complaint from the trust companies. As
they are in direct competition with banks in many ways
it is but just that they should be taxed in the same man-
ner.
CHAPTER VII
TAXATION OF RAILROADS AND OTHER PUBLIC
SERVICE CORPORATIONS
Public service corporations furnish one of the most
complex problems of taxation. This is due to different
causes. The legislature at an early -date divided public
utilities into classes each of which was taxed differently.
This system still continues. The problem has been further
complicated by Federal laws, and in the apportioning of
state and local revenues.
For many years the basis of public utility taxation was
the general tax law. Concessions, we have pointed out,
in the form of commutations and exemptions were made
to turnpike companies and bridge companies. 1 Leniency
was also shown to gas companies. In 1848 the state gave
municipal authorities power to exempt any such company
from taxation of personal property for a period not to ex-
ceed three years from its organization. 2 Not only was
leniency shown to individuals and companies undertaking
public utility enterprises, but the state itself undertook
many projects. State activity was especially marked in
building canals. 3 These canals were a source of revenue,
and railroad competition was at first looked upon with
disfavor. A law enacted in 1848 stated than any road
paralleling or nearly paralleling any canal of the state,
and within thirty miles of it, would be considered as di-
verting freight business from the canals. Because of this
the same state tolls that would have been paid had the
property been transported by canal were to be paid by the
1 Chapter I, p. 13.
2 New York Statutes, 1848, Chap. 37.
8 Don Sowers, Financial History of New York State (New York
1914) gives a good account of the expenditure of public funds.
122
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 123
railroad. 4 After 1851, however, railroads were relieved
from the duty of paying tolls. 5
The attempt to assess railroads under the general tax
law soon led to litigation. The Mohawk and Hudson
Railroad Company, in 1834, resented the attempt to tax
all its capital as personal estate. In court the chancellor
gave the opinion that a railroad was not to be assessed,
as personal estate, upon the part of its capital invested in
lands. In the same category with land he placed the rails
and other fixtures of the system. Such property, he held,
was to be taxed as real estate at its actual value, while
capital stock not so invested was to be taxed as personal
property at the location of the principal office. 6 This
decision proved but a stepping stone to further difficul-
ties. Real estate, it held, was to be assessed at actual
value but it soon became apparent that actual value was
a very indefinite term. Was the real esate to be consider-
ed as isolated and assessed on the same basis as other
property in the district, or was it to be taken as a part of
the unified system? In assessing one road the assessors
estimated the value of the entire road, taking into con-
sideration not only the physical property but earnings as
well. The value for the district was then determined by
taking such proportion of this entire valuation as the
length of road in the district bore to the entire length.
The value for the district, by this method, amounted to
about $250,000, whereas the value of the local property,
taken by itself, was found to be about $60,000. The
Supreme Court upheld the company in their refusal to
accept the assessment. The real estate of a railroad com-
pany, it held, could not be viewed as a part of a unified
system, but must be assessed in each district as the actual
value of that part found within the district. No account
4 New York Statutes, 1848, Chap. 140. This law followed others
of a similar nature which affected only particular companies. The
same provision was incorporated in the act of 1850 which governed
railroad incorporation. Heavy penalties were attached for refusal
to pay tolls.
8 New York Statutes, 1851, Chap. 497.
' Mohawk and Hudson River Railroad Company vs Chute, 4 Paige
384.
124 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
was to be taken of income or general profitableness. The
method of appraisal was to be the same as that used for
assessing adjacent lands owned by individuals. 7
This decision, given in 1851, was followed in 1853 by
the Comptroller's recommendations relating to railroad
property. He held that a railroad was nothing more nor
less than a farm, cultivated and used for its particular
objects instead of raising grain and rearing stock. It
was real estate to be assessed simply as such. 8 The Com-
troller, in his report for the preceding year, had advanced
the opinion that neither capital stock nor actual cost would
be a measure of value. Neither did he consider the dis-
trict assessors capable of ascertaining the value of rail-
road property. He suggested that such assessment might
be better made by county or even state officials, and the
value distributed to local districts in proportion to road
mileage. 9
The questions upon which this litigation was based
were soon settled by statute. In 1857 a law was enact-
ed 10 which removed railroads from the scope of the gen-
eral tax system, and which formulated a scheme for tax-
ing such corporations as a separate class. The real estate
of railroads was to be assessed locally in the same manner
as the real estate of individuals. Personal property was
to be assessed by the assessors in the district where the
principal office was located, but the proceeds of this tax
were to be paid by the companies to the collectors of the
several localities through which the road passed. The pay-
ment was to be in proportion to mileage. For the pur-
pose of arriving at the assessment, every railroad com-
pany was required to make an annual report to the as-
sessors of each district in which they owned property.
The report was to specify the land owned by the com-
pany, 11 the length, cost, present value and percentage
''Albany and Schenectady Railroad vs Osborn, 12 Brbour, 223.
8 Annual Report of New York State Comptroller, Assembly Docu-
ments 1853, Vol. 1, N >. 5.
9 Annual Report of New York State Comptroller, Assembly Docu-
ments 1852, Vol. 1, No. 10.
10 New York Statutes, 1857, Chap. 536.
11 In giving the amount of land the companies were to deduct the
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 125
depreciation of the superstructure, and the value of build-
ings belonging to the company. Such a list was to be
taken as prima facie evidence of value unless fraud were
suspected by the assessors. Whenever the correctness of
the report was questioned evidence could be taken under
oath as to its completeness and the valuation of the prop-
erty listed therein. In no case could the valuation be
made less than that found in the report of the company.
This was the first attempt by the legislature to solve
the valuation problem. The method was self-assessment
with revision by the assssors. The procedure was merely
an attempt to administer the general property tax. That
the system was defective is evident because there was no
adequate supervision of the assessment, and no assurance
that the reports made by the companies were accurate.
It was, however, enough of a departure from ordinary
methods to be viewed with misgivings by state officials. 12
The administrative features were somewhat modified in
1870, but not so as to affect its general nature. 13
In practice the assessment of railroad property was
left pretty much to the local assessor and gross ineqnal-
areas used in crossing highways. If the report was more than thirty
days late a penalty of two hundred and fifty dollars was attached.
This was to be collected by the assessors and used for the benefit
of the poor.
"The Comptroller, in his report for 1858, (Assembly Documents,
Vol. 1, No. 5) attacks the law as being unjust. He criticizes the at-
tempt to get valuations from company reports and asks that the
law be revised so as to assess railroad property in the same manner
as other property. The law was not, however, strictly applied in
all cases. Exemptions from taxation were sometimes granted for
specific reasons. For example, in 1866 (Chap. 546) the Pough-
keepsie and Eastern Railroad was exempted from the taxes upon
real estate, personal property and capital stuck until a single track
had been completed. The period of exemption, however, was not
to exceed ten years.
"New York Statutes. 1870, Chap. 506. Provision was made by
which the tax could be paid to the county treasurer. If this were
done a fee of one per cent of the tax was attached. If the tax were
not paid within thirty days the district collectors proceeded to col-
lect the tax together with a five per cent fee. The taxes paid to the
county treasurer were credited to the districts by which they were
assessed. Should this amount to more than what would naturally
be paid to the county by the district the difference would be paid
by the county to the district.
126 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ities resulted. The Special Tax Commission, 14 in their
report made in 1871, describe the working of the system
as follows :
The System of taxing railroads in the state of New York is as
imperfect and objectionable as it well can be. The road beds and
the real estate of the companies are valued and assessed in the
different towns through which the line of the road extends, accord-
ing to no uniform standard, but at the discretion or rather caprice,
of the local assessors, from whose decisions there is practically
no appeal. In some towns the standard of valuation of the prop-
erty is reported to depend on the amount annually required to de-
fray the highway expenditures; and in another instance the erec-
tion of an expensive bridge over a navigable stream was regarded
by one of the towns, on whose territory the bridge abuts, as a suffi-
cient warrant for the erection of a new school house. In one town,
where a company had substituted an expensive station house for a
dilapidated one to the great benefit of the town, the erection of the
building was immediately made the occasion of a large increase in
the taxation to which the company was subjected. The effect of
this was that the company concluded not to repeat the building of
any more expensive station houses along their line, but would get
along with cheapest buildings possible ; or in other words the action
of one town in respect to taxation, was made to result in detriment
to all other towns on the line of the road, whose need for improv-
ed station houses might be equally or more imperative. On the
other hand it is alleged that the railroad companies often endeavor
to protect themselves from what they call injustice, by threat of
retaliatory measures or by actually executing such as in the above
case. And that after all, the companies do not pay in the aggregate
in the way of direct taxes as much as would be equivalent to the
average rate imposed throughout the state on similar corporate
property such as banks, gas and manufacturing companies; rolling
stock, in their valuations being classed as real estate, while the
funded and floating debt is made to offset and neutralize as in-
debebtedness all valuations and assessments against the company
for personal property. Duing the year 1869 the aggregate tax paid
by steam railroads on real estate, according to the State engineer,
amounted to $1,565,670.52. ... If the same propety had paid
the average rate of taxation throughout the entire state for that
year (2.48 cents on the dollar) the aggregate would have amounted
to $6,859,467.75 In New York the real estate of rail-
roads as well as the road bed is assessed in the different towns
through which the road runs. The Supreme Court of Massachu-
setts which has had the question before it in at least three different
forms, has uniformly decided that land taken or purchased by rail-
road companies for their tracks, not exceeding five rods in width,
is taken in the exercise of the right of eminent domain and is there-
fore not liable to local taxation. The court held that local taxation
of a road bed was illegal bacause the road was a public work, es-
14 Report of Special Tax Commission 1871, Assembly Documents,
1871, Vol. 3 f No. 39.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 127
tablished by public authority, intended for public use and benefit,
the use of which is secured to the whole community, and constitutes
therefore, like a canal, turnpike or highway, a public easement.
After quoting the Massachusetts decision at length,
the members of the Commission expressed the opinion
that it would be better for New York to adopt the
Massachusetts system thus putting the taxation of rail-
road companies exclusively under state control. They
recommended that the comptroller or some other state offi-
cer be authorized to assess the corporate franchise at a
valuation equal to the aggregate market value of its capi-
tal stock, and funded and floating debt, less the cash on
hand. Railroads should be taxed on this value at a fixed
rate and should be exempt from all other taxes. The tax
could either be paid and used locally, or be paid to the
state and used for state purposes. Since franchises,
however, were granted in the name of all the people, and
since each district through which a railroad runs had
special benefits from the railroad in the increase of the
value of its local property and of the trade and conven-
ience of its citizens, the commission preferred that the tax
be used for state purposes. The commission expressed
the opinion, also, that one of the avowed objects of those
who had framed the tax laws [relating to railroad prop-
erty] was to get as much of confusion, inconsistency, and
irregularity in the subject matter as the circumstances
would render possible. 15
These recommendations of the special commission met
no better fate than did previous recommendations for re-
form. Inequalities continued in the assessment not only
of railroads but also of telegraph companies, gas com-
panies, etc., as well. Telegraph companies were assessed
only on their personal property. The largest company
in the state had its principal office in the state and was
assessed at only $200,000, while another large corporation
was assessed at $iooo. 16 The assessment of the railroad
property became increasingly unfair ; in some parts of the
state it was assessed higher than other real estate while in
18 Page 183 of report.
"Annual Report of State Assessors, 1874, Senate Documents,
1874, Vol. 2, No. 23.
128 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
other parts it practically escaped taxation. The rolling
stock and other personal property was seldom assessed.
One reason for this was the difficulty in determining the
principal office. Instances arose where the assessors were
told in one city that the principal office was in another
city while the tax officials there were informed that it was
in the first city. The state assessors thought that no such
amount of real estate devoted to other uses went untaxed,
whether mortgaged or not. 17 The press was equally
critical, and pointed out, that despite some cases of real
injustice to the railroads, the rate of tax paid on the capi-
tal invested was very low. The New York Times, for
example, held that the state was entitled to exact from
railroads and other great corporations some fiscal equiva-
lent for the charter privileges given them by the state.
The taxes then paid by such corporations, it was pointed
out, bore no adequate proportion to the capital invested
in the undertakings nor to the large returns secured by
the proprietors. This capital, represented by the capital
stock, bonds and floating debt, practically escaped taxa-
tion, while its enormous earnings contributed nothing to
the state. The receipts from the real estate were a baga-
telle in comparison with capital or earnings, and yet the
real estate as assessed by the district officials was prac-
tically the entire basis of taxation. It suggested a tax
upon railroads on the basis of stock, bonds, and floating
debt, which, it held, might be taken to represent the prop-
erty of the railroad. Such a basis of assessment would
simplify matters, and eliminate the necessity for trouble-
some investigation. Since, however, these three items
represent the aggregate of property to be assessed, it
would abandon the separate assessment of real estate
for state purposes. The road bed, moreover, should not
be assessed piecemeal by local authorities since it cannot
be properly taxed except as a part of the grand aggre-
gate. Neither could land taken for a right of way be
treated as ordinary real estate for in reality it was but
held in trust for the public, since the right under which
"Annual Report of State Assessors, 1877. Senate Documents,
1877, Vol. 2, No. 26.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 129
it was acquired and used was in certain contingencies re-
vocable. To treat it as real estate was to assume the com-
panies to be absolute owners. 18 That such opinions did
not weigh heavily with the legislature is shown by the
fact that by a statute of 1878 pipe line companies were
to be assessed and taxed in the same manner as rail-
roads. 19
The lack of definiteness in the law continued to cause
much litigation. The rule for the proper valuation of rail-
load real estate as laid down in Albany and Schenectady
Railroad vs Osborn 20 proved to be unsatisfactory and
later court decisions on this point show an important
change of opinion. In 1866 the Supreme Court held that
the real estate of railroad companies should be assessed
at its actual value for the purpose to which it had been
adapted and not as mere farming land. In estimating
this value the assessors were not bound to consider it
merely as land and superstructures, isolated from other
parts of the estate which contributed to make up a com-
plete and safe railroad system. 21 The Court of Appeals,
held, in 1871, that the value of each piece of property
was to be estimated in connection with its position, its
incidents, and the business and profits to be derived there-
from. 22
The first important change in the statuatory system of
taxing transportation companies came in 1880. The tax
on land and real estate remained as before, but a tax
was imposed on gross earnings in lieu of the tax on capital
and personal property. This was a state tax, to be paid
semi-annnually, of five tenths of one per cent of the gross
earnings from business transacted in the state. Compan-
ls New York Times, Editorial, April 5, 1879. An editorial for
April 8, 1879 pointed put that in the assessment of capital, the dis-
tinction between nominal and actual values must be regarded, at
least so far as the stock was concerned. With one or two well-
defined legislative rules applicable to the assessment, it suggested
there would be no serious difficulty.
18 New York Statutes, 1878, Chap. 203.
* Above, page 124.
" People vs Fredricks, 48 Barbour, 173.
22 Buffalo State Line Railroad vs Assessors, 48, N. Y., 70.
130 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ies were required to render a sworn report of their gross
earnings under a penalty of a ten per cent increase in the
tax. 23 In 1 88 1 the tax was specially made a tax upon
the corporate franchise or business in the state. 24 By a
law of 1906 a railroad company whose property was leas-
ed to another company must pay a tax of three per cent
on all dividends in excess of four per cent. 25
The laws taxing railroads, with some modifications,
were applied to other public untility companies. The
property of telegraph companies was to be assessed in
the districts where located from statements made by the
companies. 26
The assessment and collection of taxes on this form of
property was to be administered in the same way as taxes
on other real estate were assessed and collected. In 1896
all companies engaged in furnishing water or gas 27 for
heating, lighting and power purposes, in addition to the
semi-annual five-tenths of one per cent franchise tax upon
gross earnings, were required to pay a three per cent tax
on dividends declared above four per cent on the actual
capital employed. Reports were required showing cap-
ital, earnings and dividends. Elevated roads and surface
roads not operated by steam were to pay an annual fran-
chise tax of one per cent of gross earnings within the
state, and three per cent of the dividends declared in ex-
cess of four per cent on the capital employed. 28
28 New York Statutes, 1880, Chap. 542. As stated in the act it
applied to every corporation, association or joint stock company,
whether domestic or foreign, formed for transportation purposes;
to telegraph, telephone, palace and sleeping car companies. It did
not, however, apply to street railways.
24 New York Statutes 1881, Chap. 361.
25 New York Statutes, 1906, Chap. 477.
28 New York Statutes, 1881, Chap. 591. The telegraph companies
were required to furnish an annual report to the state comptroller
and to the treasurer of each county where they had property. From
the county treasurer the district officials were to get copies of the
report from which to make assessments. A law of 1886 (Chap.
659) defined "lines" as including interest in lands on which poles
stand, right to erect poles, and the poles, wires, arms, insulators,
etc., used as a part of the line. It further gave the tax collectors
the right to sell a part of the line for unpaid taxes and to convey
it to the purchaser.
27 Possibly a comma is omitted after gas. See note on page 135.
2 * New York Statutes, 1896, Chap. 908.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 131
These statutes, with slight modifications, remain in
force and represent the present law for the taxation of
public service corporations. All are subject to the annual
franchise tax except elevated railways and surface roads
not operated by steam, and water, heat, light, and power
companies. The exempted railways must pay an annual
tax of one per cent of the gross earnings within the state
besides a tax of three per cent on dividends in excess of
four per cent on the actual amount of capital invested.
The water, light, and power companies must pay an an-
nual tax of five tenths of one per cent of gross earnings
and the three per cent tax on dividends in excess of four
per cent on capital invested. In addition to the annual
franchise tax all transportation and transmission compan-
ies must pay the "additional franchise tax." This amounts
to five tenths of one per cent of the gross earnings. All
are subject to the organization tax and the stock transfer
tax. 29 These taxes which are all for state purposes are
in lieu of all other taxes for state purposes upon per-
sonal property. The companies are, however, assessed
and taxed locally the real estate at situs, and the capital
stock at the place of the principal office. Since the state
levies a small direct tax, a part of the local tax on cor-
porations goes for state purposes. It would seem that
only that tax assessed on real estate could be so used.
There has been a great deal of litigation since these
new taxes have been inaugurated, but this has been due
only in small measure to the state taxes. The large ma-
jority of cases have arisen from the continued attempt to
apply the general property tax to railroad and telegraph
companies. In the case of the state tax it has sometimes
been necessary for the courts to determinine just what the
gross earnings were or what were derived from business
"originating and terminating within the state." The
Court of Appeals held, for instance, that money received
for carrying the mails was not taxable where it was im-
29 See Chapter II page 31 for a discussion of the Organization Tax,
and Chapter III page 52 for the Stock Transfer Tax. In addition
to these taxes there is the Special Franchise Tax which is discussed
in the next chapter.
132 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
possible to ascertain the proportion of the mail traffic
which originated and terminated within the state. 30
The questions as to the proper valuation of real estate
is responsible for most of the cases relating to local taxa-
tion.. The courts have alternated between earnings and
the cost of reproduction as the proper basis of valuation.
Most of the decisions in the 70'$ and 8o's attributed an
important place to earnings. The Court of Appeals, for
example, in 1871 held that the assessors were justified
in taking into consideration the earning power of the
road considered as a whole. This was because, it held,
"a railroad through the town only, having no connection
at either end, would be of no value. The erections and
superstructure would destroy its value for farming pur-
poses. As a railroad it would have no passengers and no
business and would be worthless. The attempt to use it
as such would involve debt and embarrassment but no
profit. . . . Each piece of property is to be estimated
in connection with its position, and the business and profit
to be derived therefrom. The road in question is part
of a whole and is to be valued as such. This is independ-
ent of the taxation of the capital. It is the estimate of the
value of the real estate for railroad purposes as a mill is to
be estimated for its value for milling purposes and not as
its value for a church or banking house." 31
In 1882 the Supreme Court held that a railroad should
not be valued for taxation as a long narrow strip of land
used for farming or for any other purpose except as the
bed of a railroad. Nor should the part of a railroad in
a particular town be estimated by the cost of any expen-
sive rock cut, or quicksand filled, or a terminal located in
that town. It should be valued as a part of a whole and
the consideration of profits should have a large, if not
controlling, influence upon the value. 32
80 Morgan vs New York Central and Hudson River Railroad, 168
N. Y., 1.
81 Buffalo and State Line Railroad Company vs Assessors, 48 N.
Y., 70.
82 O. & L. C. Railroad Company vs Pond, 13 Abbott's New Cases,
1. In the cases of Albany and Greenbush Bridge Company vs.
Weaver, (34 Hun, 321) and Powers vs Kalbfleish, (25 Appellate
Division, 432) practically the same attitude was taken.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 133
In 1897, however, the Court of Appeals held the re-
production cost to be the proper basis for valuation. The
Delaware, Lackawanna and Western Railroad Company
had been assessed on seven and one half miles of road,
the cost, rentals, and earnings being taken into considera-
tion. This assessment was admitted to be higher than the
cost of reproduction. The court pointed out the difficulty
of formulating, from the adjudged cases, any general rule
applicable in all cases to the valuation of the real estate of
a railroad company for the purpose of taxation. The cost
of reproduction, said the court, seems to be the just and
reasonable rule of valuation, and it could conceive of no
reason for assessing the property at a greater sum than
this. Whether it was really worth what it would cost to
reproduce it would depend upon the earning capacity of
the road after it was built. After a road had been valued
at what it would cost to procure the land, construct the
road bed, put down the ties and rails, and erect the build-
ings all new, it was difficult to see any ground for assess-
ing it at a larger sum. The value of a railroad for taxa-
tion might be much less than the actual cost of produc-
ing the property in the condition in which it was found
by the assessors, but it could never exceed it. Any method
of assessment was erroneous which included the privileg-
es and franchises of a company in the valuation of its real
estate. 33
In commenting on this decision the New York Public
Service Commission for the Second District pointed out
that the real ground of the decision was not that the cost
of reproduction was necessarily a true basis of value, but
the only practical and practicable one. They interpreted
the reasoning of the court somewhat as follows : The as-
sessors were to assess the real estate and when they be-
gan to try to determine how much was earned from in-
tangibles and franchises, erroneous decisions would nec-
* Delaware, Lackawanna & Western Railroad Company vs Clapp,
152 N. Y., 39. In 1908 the same court held (O. & W. Railroad
Company vs Shaw, 202 N. Y., 556) that reproduction cost was the
maximum valuation, for tax purposes, to put upon the part of a
continuous railroad situated within a given tax district. If the road
were not a paying one the valuation might even be less.
134 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
essarily result. Such determinations were too great for
the capacity of the average assessor; that assessors had
better be confined to the simple, definite assessment of real
estate, easily applied and which would result in practical
justice. The court, pointed out the commission, adopted
the cost of reproduction with all its known absurdities
and inconsistencies. In one town five miles of track may
have been constructed with little expense while in an ad-
joining one cuts and fills may have been expensive. One
portion would be as great value to the operation of the
road as another. If there was any theory upon which
such discrepant theories could be justified it was cost of
reproduction; yet it was doubtful whether the end was
accomplished by that sort of assessment. 34
The decision, however, is more logical than this interpre-
tation would indicate. If the property, track, buildings,
road bed, etc., were to be assessed piece-meal and disjoint-
edly, then the reproduction cost would represent the
maximum value any particular portion could have. Very
often the value might be less than this. It is only in as-
sessing the company as a whole that the earning capacity
can be considered since this is an attribute of the whole
plant and not of any small isolated part.
In 1908 the Appellate Division of the Supreme Court
prescribed a method for the valuation of the property of
a water company. This differs from the methods just de-
scribed in that it took earnings as the basis for the as-
sessment. It held that where a water company owned
tangible property outside the street, and both tangible
and intangible property in the street, 35 each of these three
classes should be considered as contributing pro rata to
the net earnings according to its respective value. Actual
value and not cost was the true basis of taxation, hence
the value of the intangible property the mere right to
lay water mains must be determined by treating it as a
part of the plant and basing its value upon capitalized net
earnings. Intangible property had a value if it was earn-
M Report of New York Public Service Commission, Second Dis-
trict, 1913, Vol. III. p. 306.
M By tangible property in the street the court meant the fixtures,
etc. while the intangible property was the right to use the street.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 135
ing an income and if, even with good management, there
was no adequate return, it had correspondingly little
value. The value of the property of a water company for
the purpose of taxation, especially the value of its fran-
chise and good will, could not be ascertained until the
franchise tax, 36 all other taxes and a proper up-keep fund
have been deducted from current earnings. The earnings
and expenses for one year alone should not be considered,
but the average earnings and expenses for a series of
years or for such time as is reasonably available. The
method prescribed for finding the value of intangible
property was as follows : from earnings deduct salaries
and other expenses of maintenance, all taxes including
approximate amount of the special franchise tax and such
earnings as would be proper for all up-keep not ordinarily
covered by maintenance account; the balance was to be
treated as the actual net earnings. From this six per
cent of the value of real estate and other tangible proper-
ty was to be deducted as a fair return on investment. The
earnings which remained, capialized at six per cent, would
represent the fair value of the intangible property. 37
Here a definite rule for the valuation of a public utility
company for taxation is given with capitalized net earn-
ings as the fundamental basis. Yet this rule proved no
more satisfactory than former ones and many assessors
continued to use their own guess work in valuation. The
reasoning of the Public Service Commission which we
have noted above, and the complexity of the system pro-
posed easily explain why it is not generally used. Many
assessors do not have the time or inclination to use such
schemes as the courts may dictate while many others do
not possess the ability to use them even if they had the
desire.
36 This undoubtedly has reference to the special franchise tax
which is discussed in the next chapter. Section 186 of the tax law
Exempts companies formed for supplying water or gas,or for elec-
tric or steam heating from the annual franchise tax. A literal in-
terpretation of Section 183 of the same law would subject general
water companies to the annual franchise tax. Under the list of
exemptions it states that companies formed for supplying water or
gas for electric or steam heating shall be exempt.
87 Jamaica Water Supply Company vs Tax Commissioners, 128
Supreme Court, Appellate Division, 13.
136 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
The present system of taxation, though somewhat com-
plicated because of the elaborate classifications of public
utilities, did get rid of some of the old difficulties. With
the adoption of uniform accounting, corporation reports
are becoming more trustworthy and a part of the taxes
are easily computed. The gross earnings tax for state
purposes has secured a greater equality than when the tax
was levied by the local assessors, and is of course a real
advance. A large amount of inequality has been found in
telegraph valuations since these companies have practical-
ly been made their own assessors. The estimated cost of
lines as returned by the various companies has shown
great disparaities. Although some valuations were ex-
tremely low, yet there was no official review and power
to question their correctness was nowhere specifically
given. But the system has worked smoothly enough so
that there have been few complaints from either state
officials or the corporations, and consequently the courts
have had little to do.
This has not been true with assessment and taxation
for local purposes. Complaints of inequality continue,
and litigation increases. This last is initiated largely by
the railroad companies who claim that their property is
assessed at much higher figures than is other real prop-
erty in the same districts. Many other states are far in
advance of New York in seeking to remedy these evils.
They have recognized the impossibility of securing equal-
ity and justice in the taxation of utility companies
through local assessors, and have conferred the power of
assessing such companies upon some central board. In
New York both state officials and other persons as well
as organizations have continued to advocate that such
assessment be taken from local officials and given over
to a state board. The fourth State Conference on Taxa-
tion which met in 1914 at Syracuse adopted the follow-
ing resolution : Whereas, The present system of the as-
sessment of the real and personal property of railroads
and other large corporations by local assessors imposes
an unnecessary and difficult task upon such assessors and
leads to inequitable results, and, Whereas, This method
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 137
of assessment has been abandoned in many other states,
it is Resolved, That the laws should be so changed as to
empower the State Board of Tax Commissioners, or ex-
perts employed by them, to assess the real property and
other taxable assets of railroads and of large public ser-
vice corporations operating in more than one tax district.
To establish a uniform system of taxing public utili-
ties which will be just to the corporations and the public,
equitable, easily administered and which will leave no
room for evasion is a difficult task. A number of dif-
ferent systems have been tried with different bases for
the tax but none of them has the unqualified support of
every authority on taxation. That the New York system
should be recast and improved, however, all agree, and
we shall briefly note some possible alternatives or modi-
fications.. The systems which have been most discussed
are a gross earnings tax, a net earnings tax, and the more
conservative method of maintaining some form of the
ad valorem system.
New York at present, we have seen, uses gross earn-
ings as a basis for part of the additional franchise tax.
This basis for taxing corporations, and especially public
service corporations, is at present widely advocated. Some
of the advantages claimed for the gross earnings tax may
be briefly summarized.
With gross earnings taken as the basis for taxes we
do not find the difficulty of ascertainment as when net
income is taken. There has been comparatively little dis-
pute as to what constitutes the gross returns of a corpor-
ation, but difficulties have been encountered in apportion-
ing this to expenses and net returns. 38 Any system of
accounting will give the gross earnings and no question
arises as to what items should be allowed. All items of
expenses must be taken from the gross receipts, and it
is not at all illogical to consider taxes an item of expense
just as much as wages, rent, etc. The discretionary pow-
ers of officials can easily be dispensed with since there is
little chance of manipulating the gross receipts statement
88 This objection would have little weight in the case of New York
since practically uniform accounting systems have been prescribed.
138 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
and the tax can be computed by simple mathematical cal-
culation. Expenses of assessment and collection would
likewise be reduced to a minimum, so the tax would "take
out and keep out of the pockets of the people as little as
possible over and above what it brings into the public
treasury of the state." It conforms, moreover, more
nearly to the American idea of a just base for taxation-
property than does net income. This sort of a property
basis does not tax a concern until it has really been es-
tablished upon an operating basis. The tax would fluctu-
ate with business conditions ; it would increase as business
prospered and become a smaller burden in times of de-
pression. It is a tax admirably adapted to meet the vary-
ing demands of the state since it can be easily modified,
and will automatically increase with the prosperity of the
state. The assessment upon which the property tax is lev-
ied, on the other hand, tends to become stationary. As
previously pointed out, this has been particularly true in
New York.
Some think that the gross earnings tax would work in-
justice particularly in the case of railroads. Many, howev-
er take the opposite view while a numbr of tax commission
reports uphold such a tax. The Ontario commission in
1905, after making an exhaustive study of railroad taxa-
tion, said:
The gross earnings tax will cause no substantial inequality in the
roads operating in Ontario, and as regards equality, there is little
to choose between the gross and net basis. The choice would be
determined on the ground of facility and certainty in ascertaining
what is gross and net revenue. There is little dispute in determ-
ining gross revenue, while there is endless dispute in dterm-
ining net, especially where it is to the interests of the company to
minimize net earnings in order to escape taxation. There is no
hesitation in selecting gross revenue as the simplest and most direct,
and considering all the roads the most equitable basis of taxation.
Earnings as a basis is fair because taxes vary with the capacity of
a company to pay them whereas taxes on general property results
in all manner of inequality. The amount of tangible property of
various corporations has no necessary relation to their relative
earning power and bears no accurate relation to the earning power
of the same company at different periods. Only the tax on earn-
ings follows automatically the capacity of the corporation to pay,
and while it has its enequalities, it is much more equitable than any
other practical system. The tax has the further advantage that
all the processes connected with its operation are matters of public
record. Thus the railroad on the one hand and the government
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 139
and public on the other may know exactly the basis of valuation,
the rate of tax and the relative contributions of the tax payers in
proportion to their business. Where the valuation depends more
or less absolutely upon the opinion of one or two assessors who can
not be quite sure of their own estimate either individually or col-
lectively, it is obvious that the most unusual power without any
adequate check is placed in the hands of one or two men. Where
he has small properties to estimate and where each man's property
was known to his neighbor this system had few difficult evils. But
where railroads and other corporations the value of whose prop-
erty is hardly known to themselves, are required to pay millions of
dollars in taxes without any knowledge as to how their own or
their rivals' assessments are made up, and where the public is nec-
essarily in even more complete ignorance the opportunity and temp-
tation is very great to bring influences to bear upon the government
for the appointment of favorable assessors or upon the assessors
themselves, for a favorable valuation. It is not in the interest of
pure politics or sound finance, and it is certainly not fair either to
the assessment boards or general public for a system of taxation
to place such enormous interests as the value of many millions of
corporate property in the hands of two men.
One of the most important advantages is that it does away with
the difficulty of the taxing of franchises. Probably no aspect of
modern economic wealth has given rise .to such elaborate and confus-
ed discussion and even outlandish theorizing as the so-called "fran-
chise" values. It is a confusion of the two economic phases in
which "franchise" is used to indicate property value with the oc-
cassional intoduction of legal aspects which has contributed so
much to the darkening of counsel on the subject. Mr. Thomas F.
Woodlock of Wall Street Journal reported to the commission that
he favored a gross earnings tax. Then you cannot charge expenses
for wholesale betterments, etc. It may happen that one road is
compelled to operate at seventy five per cent of expenses and anoth-
er at fifty, but the gross earnings are most suitable because easily
ascertained. Mr. Hugh L. Bond, second vice-president of the Bal-
timore and Ohio Railroad, stated to the commission that he thought
on the whole the most equitable basis fo rthe taxation of railroads
is the gross receipts. 89
This quotation, of course, applies in particular to a
Canadian country but conditions there are not dissimilar
to those found in New York. But we do not have to
go to Canada to find the gross earnings system advocated
and tried. The reports of the tax commissioners of both
California and Minnesota heartily indorse it. The Cali-
fornia commission in 1906 said that it would result in a
closer approximation to justice than any other system
which the state might select. The burden would vary
with the fund out of which the taxes were to be paid.
"Report of Ontario Commission on Railroad Taxational 1905.
Printed in State and Local Taxation, 1911.
140 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
Practical considerations naturally outweighed theoretical
ones and the advantages of this tax were largely practi-
cal. 40 The Minnesota commission in 1910 pointed out that
the greatest advantage of such a tax was the elimination of
the necessity for valuing the complicated and peculiar
properties of the corporation. Such valuations had been
inaccurate and but crude guess work. To even approxi-
mate a fair value of such property required in each case
the knowledge and skill of experts. A tax on gross earn-
ings, moreover, not only rendered taxation a mere mat-
ter of mathematical computation, but gave to the system
a desirable certainty and reliability. The method was
the best yet suggested and the practical experience of a
few years would fix a fair rate. 41
In 1911 the Connecticut legislature appointed a com-
mittee to prepare a report on corporate taxation. This
report was made in 1913 and, after a thorough examina-
tion of the other tax systems, recommended the adoption
of the gross earnings tax. On pages 6 and 7 we find :
The tax on gross earnings avoids all the difficulties inherent in
the tax on net earnings. No corporation can do business without
having accounts which will at least show the amount of its gross
earnings. Gross earnings are a definite fact, ascertained by a glance
at the accounts, and incapable of argument or difference of opinion.
The tax on gross earnings can be evaded only by perjury of the
most obvious sort and capable of easy detection. The gross earnings
tax, therefore, has the greatest advantage of simplicity, certainty,
and ease of administration. This is an advantage both to the cor-
poration and to the state. The amount of the tax on gross earn-
ings fluctuates with the posperity or adversity of the business and
is therefore, just to all parties concerned. Moreover, it enters
each year into the accounts in a definite ratio, and can thus be count-
ed on in advance.
A serious question remains to be answered. Will not the tax
on gross earnings be distinctly unfair on account of the great di-
versity between different corporations in their ratios of expense to
earnings? The answer is that such injustices is to be avoided by
classifying corporations according to the prevailing ratio of net
earnings to gross, and imposing different rates upon the gross earn-
ings of the different classes of corporations.
Investigation shows, for instance, that the ratio of net earnings
to gross is fairly uniform for the railroads of the country. In the
40 Report of California Tax Commission, 1920. Printed in State
and Local Taxation, 1911.
41 Report of Minnesota Tax Commission, 1910. Printed in State
and Local Taxation, 1911.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 141
same way there is a general prevailing ratio of net earnings to gross
fo rtelephone companies, fo express companies ,etc. Having de-
termined what this prevailing ratio is for each class of corporations
we are enabled to fix ratios fo reach class which will make the tax
on goss earnings just to all. It is true, of course, that absolute
justice as between individual corporations of the same class is not
obtained. The resulting injustice is, however, not great
Some inequality is unavoidable but the inequality thus esulting is
distinctly less than can be easily shown to result from any of the
other schemes of taxation which are before us. No tax system
can be absolutely perfect, and it is not a valid objection against a
proposed scheme to point out a defect which is present in even
greater degree in each of the other possible alternative measures.
We conclude, therefore, that the tax on gross earnings presents
distinctively the most advantageous method for the taxation of pub-
lic service corporations. 42
The commissioners continue, in this report, to show
how the classification shall be made, how the ratio be-
tween gross and net earnings shall be determined, and
give formulae for finding the proper rate to be imposed
on the gross earnings. They hold that the rates should
tax the different classes of corporations fairly as compar-
ed with the taxation borne by other forms of wealth.
Other reports have been favorable to the gross earn-
ings tax and a number of states use it as supplementing
other taxes. Different schemes, as suggested by the quo-
tation we have just given, may be used to secure justice.
If a flat rate on gross earnings be considered unjust, the
remedy lies in classification of the corporations. No ob-
jection could be made to classification in New York since
it is used in the present tax system. Classification may be
on the basis of the enterprise, the relation of gross to net
revenue, or both. In any departure from the flat rate
great care should be taken that greater inequalities are
not introduced than if a flat rate were maintained. 43
42 Report of the Special Commission on Taxation of Corporations,
State of Connecticut, 1913.
48 An interesting scheme for assessing the gross earnings tax has
been proposed by Mr. Allen Ripley Foote, ex-president of the Nat-
ional Tax Association. He proposes a flat rate on gross operat-
ing revenue, plus a differential on the margin of difference between
operating revenue and operating expenses. He would make this
a substitute for all other kinds of taxes. Such a scheme, he thinks,
combines both the principles of the property and income tax which
would satisfy the advocates of each of these systems while justice
would be given to the corporations. He proposes that a flat rate
142 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
In spite of this wide advocacy and apparent success of
the gross earnings tax, we must admit that it has serious
difficulties. Gross receipts do not represent earning ca-
pacity, and it is earning capacity that makes a concern
valuable and able to pay taxes. It is what a concern has
left after expenses are paid that spells success or failure.
The gross returns of two street railway concerns for ex-
ample, might be the same, while the net returns might
be such as to make one a success and the other a failure.
The one might be working under auspicious circumstanc-
es short lines, heavy traffic, level streets, etc. while
the other would have the opposite conditions. Similar
conditions are found in varying degree in all classes of
public utility corporations and it is too much to suppose
that any system of classfication can properly take them
into account. The tax, then, will to a greater or less de-
gree be ununiform as between corporations, to say noth-
ing of its relation to other taxes.
The experience of Michigan and Wisconsin, moreover,
would tend to weaken our faith in the adequacy of the
gross earnings tax. Both states have given it a thorough
trial and have thrown it over-board. Wisconsin had the
system for nearly fifty years, but gave it up in 1902. The
reasons assigned by the officials of both states for this
failure to give satisfaction were practically the same.
Uniformity could not be secured between the corporations
and there was no relation between the tax paid on cor-
porate property and on other property. The governors
under whose administration the gross earnings tax was
given up, had pledged themselves to equality in taxation.
It is contended by some, however, that a tax based up-
of two per cent be assessed on the gross operating revenue of all
corporations regardless of the margin of difference between their
total revenue and total operating expenses. This is to be paid by
all corporations whose operating expenses are ninety per cent or
more of operating revenue. To this is to be added a differential of
one-sixthteenth of one per cent computed on each one per cent in-
crease in the margin of difference between total revenue and total
operating expenses in excess of ten per cent. Theoretically such a
method would obtain a reasonable amount of justice, but the prac-
tical difficulties in determining the differential would no doubt de-
feat the end intended.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 143
on net earnings will do more towards obtaining 1 justice
and equality than can a gross earnings tax. Net earn-
ings can be used, either as the direct basis for the tax or
as the basis for finding the value of the company. If the
capitalized net earnings be taken as the proper valuation
of a concern then no account need be taken of capital that
may have been issued and squandered, the different forms
of stock exchange manulipulation or the watered stock a
company may have. The factor under consideration is
what the enterprise is worth as a productive agent or as
a going concern. The original cost and cost of reproduc-
tion are not the controlling items which determine value ;
that is determined by the one characteristic power to
bring in a money return over and above expenses. The
captalized net income would most nearly correspond to
what a purchaser would be willing to pay at a natural
sale and this the courts have held to be the value of
property.
Mr. W. S. Stevens, a member of the New York Public
Service Commission, expressed the opinion that the net
earnings tax was the one tax that would have the support
of basic principle. To quote :
An inquiry into the value of railroad property as a whole is an
investigation of the question how much will any person or collec-
tion of persons desire to possess the property, and how much money
or other things will they be willing to part with for the sake of
such possessions. The difficulty attending the investigation is: 1.
The property has never been bought or sold so there is no direct test
or evidence of its ratio of exchange for money or other things; 2.
It is not one of a class of things which is bought or sold with such
frequency or under such circumstances as to afford a fair test of
what it would be likely to bring upon exchange or sale
The only course open to the investor is to select those attributes
which in his judgment would create a desire for the propety, and
then estimate how much that desire would induce a prospective pur-
chaser to surrender for its satisfaction Its one charac-
teristic which gives it value is its supposed power to yield, directly
or indirectly, a moneyed return equal to the investment with a
profit thereon. Its value lies not in what it is but in what it will
produce or what it is believed it will poduce in money. This is
the essential proposition upon which all depends. Generally speak-
ing, what it will produce in money will depend upon its earning
power, directly or indirectly. To the ordinary investor it is its
direct earning power as shown by the excess of revenues over
expenses . This fundamental consideration
indicates that the net earnings rule, when properly and care-
144 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
fully applied with due regard to all the features of the individual
case is probably the one having the surest support of basic principle.
It is also the one which accords with the practice of shrewd, broad-
minded and successful men of business. 44
In spite of the apparent logical and theoretical sound-
ness of net earnings as a tax basis, many practical diffi-
culties are met in its administration. One, which has
proved most troublesome, is in determining the true net
earnings. Accounting systems have been anything but
uniform, and no comparison could be had between net
earnings of different enterprises. This applies, however,
with little force to New York since in recent years practic-
ally uniform accounting systems have been arranged for
public utility corporations. Even with uniform account-
ing the difficulty might still remain of separating the
earnings of the utility company from those of its invest-
ments or subsidiary undertakings. Neither would the
system secure equality in assessment between public util-
ity companies and other forms of taxable property. The
difficulties which Wisconsin and Michigan found with
the gross earnings tax would be magnified here. A man's
farm and buildings are taxed even though they are pro-
ducing no more than expenses. Yet a railroad with an
investment of several million dollars would not be taxed
until it became operative to the extent of having a sur-
plus above expenses. Because of the fluctuation of earn-
ings, the amount of the tax could not be counted upon
as being in any degree stable.
The special commission which reported to the Connec-
ticut legislature in 1913 in favor of the gross earnings
tax characterized the net earnings tax as follows :
To avoid serious inequality and evasion the tax on net earnings
would require for administration a thorough examination into the
accounts of every corporation taxed, together with strict rules as
to how these accounts should be kept. ... It would be a con-
tinual source of irritation between the corporation and the taxing
officials. It would involve the most disagreeable inquisition into
the accounts and business of the corporations, and in the end there
would still remain room for personal judgment, thus leaving open
the door to political intrigue and corrupt influence The
practical difficulties in the way of imposing a tax upon net earn-
ings seem overwhelming. A further objection arises from the fact
44 Quoted in State and Local Taxation, 1912, p. 194.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 145
that a corporation might have no net earnings whatever in a given
year, and therefore escape taxation entirely. While it is true that
this might be perfectly just under a tax system based fundamentally
upon income, we should bear in mind that the American tax sys-
tem is today based upon property. The individual whose property
has yielded him no income in a given year cannot offer that as a rea-
son why he should not pay taxes upon his property. While the import-
ance of treating corporations and individuals upon the same foot-
ing must not be stretched, there can be little doubt that a tax sys-
tem which would allow corporations having no net earnings to es-
cape taxation entirely would be out of harmony with the general
tax system prevailing in America. 43
The objections to the ad valorem basis for taxing public
utilities are due largely to misunderstanding of the term,
and to the discrepancies which have arisen in attempting
to apply different methods of valuation. As now used,
an ad valorem tax means a tax based upon the value of
a public utility as a piece of property rather than as divid-
ed up into different elements. The system further im-
plies a more or less expert valuation of the corporation
property by some centralized state board.
The discrepancies have arisen because of the limited
powers of the assessors, or because too few factors have
been taken into account in arriving at the valuation. One
particularly troublesome feature has been to secure the
value of the so-called franchise. The excess value of the
stocks and bonds over the value of the real estate has been
suggested as the value of the franchise. The average
selling price of securities for a period of years is taken
as the value. This is done in order to take account of any
fluctuations due to seasonal disturbances or stock ex-
change manipulations. The greatest difficulty is perhaps
in application. Thus the Michigan Tax Commissioners
point out the difficulties which they encountered :
But as far as applying this theory to all the railroads in Michigan
was concerned, it was found to be impracticable from the fact that
the stocks and bonds of but comparatively few of the railroads
were quoted in the market, that the stocks and bonds of many of the
railroads were unknown to the open market, and the method could
be applied only to the few railroads. Then, too the computation of
the bond value is rendered intricate and uncertain by reason of the
fact that there may be several different issues of bonds issued by
a company upon different portions of its line or upon the same por-
48 Report of Special Commission on Taxation of Corporations,
Connecticut, 1913. Page 35.
146 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
tion of its line ; or the issue may have been made at a certain time
covering the whole line, since which time the line may have been
extended without it appearing how the issue is affected, or in what
manner.
Another difficulty encountered in attempting to apply the stock
and bond method in determining the value of railroads lies in the
separation of railroad property devoted to operation from the prop-
erty owned by the railroad but not used in its operation. The stocks
and bonds of a railroad company represent the value of all the prop-
erty of that company whether devoted to operation or not ; manufac-
turing plants, mines, elevators, etc And when we con-
sider, in addition to the intricacy and uncertainty of the computa-
tion of stock and bond values, the manipulation by stock brokers,
regardless of the many conditions that affect the price or value of
the stocks and bonds regardless of the real value of the property
itself, we cannot but appreciate the incompetency and unreliability
of the system. 46
This criticism is made to the application of the stock
and bond method for valuing railroads but it is applicable
in varying degree to public utilities. Administrative diffi-
culties have likewise arisen in the attempt to find the
value from earnings, initial cost, or reproduction cost.
The item that is a determining factor with one concern
may be unimportant for another. The report of the Con-
necticut Special Tax Commission which advocated the
adoption of the gross earnings tax, characterized the ad
valorem basis as follows :
To be properly performed it requires the work of a large force
of experts familiar with the technical details of the business of the
corporations concerned. At best the element of personal judgment
is sure to enter Besides practical difficulties, important
theoretical questions arise. In the majority of cases there is and
can be, no such thing as an actual sale of the property of a public
service corporation. The selling price is, therefore, unavailable as
a basis of valuation. Shall the appraisal, then, seek to determine
the original cost of the property or the cost of replacement, and
if the latter, shall allowance be made for the present condition due
to depreciation? .... Another difficulty with this method is
its rigidity. Valuations when once made are very likely to remain
for a considerable number of years without serious revision. This
is caused partly by the very fact of the difficulty and expense in-
volved in a thorough-going valuation. As a result, such valuations,
no matter how successfully made at the start, very soon come to
the unreliable. 47
We note, however, the attitude of Wisconsin, Mich-
49 Report of Board of State Tax Commissioners, Michigan, 1909-
1910. P. 55.
47 Report of Special Commission on Taxation and Corporations,
Connecticut, 1913, page 2.
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 147
igan, and Virginia to the ad valorem basis, we must ques-
tion that it is wholly bad. Wisconsin, as we have seen,
gave up the gross earnings tax in its favor and that, too.
after the courts had stretched the constitution to declare
the legality of the former. The attitude can be seen from
the following extract from the report of the Wisconsin
Tax Commission for 1910:
By substantially uniform ad alorem methods a nearer approach
can be made to equality in tax burdens as between the different
classes of public utilities, and as between them and general property,
than seems practicable by resort to earnings as the basis of taxa-
tion. A tax based upon earnings at fixed rates involves the problem
of ascertaining rates which are just and which will accomplish sub-
stantial equality of burden with property taxed by other methods.
. . . . In respect to most of the property employed in the various
public service enterprises now under consideration such method
seems fairly well adapted if the work of assessment is committed
to officers having facilities for obtaining the necessary data and
who are fairly qualified to make intelligent and impartial valua-
tions. 48
The attitude of the Michigan Tax Commissioners is
very similar to that taken in Wisconsin. In a report
to the Governor in 1914, moreover, the Virginia Joint
Committee on Tax Revision, after a careful analysis of
different tax bases, says: "We believe that under an ad
valorem system administered by a competent board un-
trammeled by any single prescribed standard or rule, it
is easier to establish justice in taxation than under any
other method. 49
It would seem, then, that the success or failure of the
ad valorem tax to secure justice depends upon the com-
petency of the assessing board, and the extent of power
conferred upon it. We would consider it absurd to send
a man or group of men to value a carriage who had spent
their life as sailors. And we would consider it just as
absurd to instruct men who were competent to determine
the value of a carriage, to arrive at such value by taking
into consideration only the wheels, or bed, or pole, or top.
A particular carriage might have no top, or shafts instead
of pole, or the wheels might be newly painted, so that no
48 Report of Wisconsin Tax Commission, 1910, page 52.
*' Report of the Joint Committee on Tax Revision, Virginia, 1914,
page 138.
148 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
one of these could be taken as the determining factor in
its value. Likewise they should be allowed to ex-
amine the spindles and tires to see how much they were
worn in short take all parts into consideration to de-
termine its value. So, in finding the value of a public
utility, not only must we have a competent board, but it
must have broad powers. It must be allowed to consider
all the factors which may contribute to its value fran-
chise, reproduction cost, earnings, etc. Not only must
it be given power to consider all these items, but it must
be given access to them. In order to efficiently carry on
its work, the books, accounts, and records of the compan-
ies must be placed at its disposal. It should be empow-
ered to examine witness and require reports in short
given every possible privilege which will enable it to make
a proper valuation. Where we have this combination
a competent board with extensive powers the prevalent
objections to the ad valorem basis for taxation are great-
ly minimized.
A tax on earnings, moreover, is not such an out and out
departure from a tax on value as it at first would seem.
When we do not regulate the charges for services there
may be no definite relation between the property in use
by plant and its earnings ; but we have adopted the policy
of so regulating the charges made by public utilities that
the net earnings shall represent but a fair return on the
value of the enterprise. Of course there is no absolute
rule for determining the value upon which earnings shall
be allowed, and it is impossible to determine value so ex-
actly or to fix rates so accurately in each particular case
that a fair return will just be realized. But the more
nearly this is approximated the more nearly will a tax
on earnings correspond to one on value. It could make
little difference in a case of perfect valuation and regula-
tion of charges, where ten per cent were allowed as a fair
return, whether ten percent of the net earnings were
taken or one per cent, of the valuation. Because of the
indefinite relation between net and gross returns, however,
there could not be this close approximation between a
gross earnings tax and a tax on value even if regulation
RAILROADS AND OTHER PUBLIC SERVICE CORPORATIONS 149
could be such as to allow just a fair return. Yet they
more nearly correspond than under a system of no regula-
tion.
Justice in tax reform is a relative rather than absolute
expression. We cannot hope for absolute justice between
corporations or between corporate property and other
property. But there is no reason why it should not be
more nearly approximated in New York than at present.
The substitution of either an earnings tax or a tax on
value, notwithstanding the difficulties connected with
each, would prove more satisfactory than the present
combination of franchise, earnings, and dividend taxes.
Such action would mean a change from the present com-
plexity to comparative simplicity. Corporations would
at least know upon what they were being taxed, and could
more nearly anticipate their tax burdens. Simplicity
would bring intelligent publicity, with greater ease in ob-
taining justice among the public utility enterprises them-
selves, and between the taxes assessed to such companies
and those laid upon other taxable property. Centraliza-
tion of the assessing authority would facilitate checking
up any discrepancies that might exist. In short, it would
make for uniformity and fairness, and where this has been
accomplished it has been found that corporation officials
were willing to cooperate with taxing officials to secure
efficient enforcement of the law.
If the system of taxing public service corporations for
state purposes needs reform, the system for taxing them
locally needs it doubly. The incongruities depicted by
the Special Tax Commission in iS/i 49 still remain. Re-
form might be secured by the entire abolition of local as-
sessment of public utility property 50 if the localities could
be made to see that, by so doing, they would not be the
losers, and the legislators could be made to see that great-
er equality would be secured thereby. It would seem ad-
visable that some centralized authority should have in
charge, at least, the assessment of those companies whose
plants extend into several districts.
* See above p. 126.
* This is of course on the assumption that the courts would uphold
the constitutionality of such a change.
1 50 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
If some form of unit assessment, however, be adopt-
ed for determining the state taxes, reform in securing
local revenue from these same enterprises could be accom-
plished with litttle added burden or expense. The amount
intended for local purposes could be added to the state
assessment and then distributed to the districts. The
difficulty arises, of course, in choosing a basis for distri-
bution. This could be made in proportion to the amount
of trackage in the dstrict, the amount of property located
there, or the amount of business arising within its bord-
ers. From many standpoints the first of these has advan-
tages. Where the business is greatest, the main lines are
not only duplicated, but are supplemented by side tracks
and switches. If it were considered that justice so de-
manded, the main lines and side tracks could be counted
as having different importance.
Such allocation would rarely be needed except in the
case of transportation and transmission companies. If a
property basis were taken it would introduce the necessity
for local valuations and the possibility for inequality.
The tendency, no doubt, would be towards high valua-
tion since the higher the value of the property in the dis-
trict, the more tax it would receive.
Because, then, of the complexities of the present sys-
tem of taxing public utility corporations, because of the
discrepancies and inequalities which exist, not only be-
tween the different corporations but between the assess-
ment of the corporate property and other property, we
conclude that reform is needed. In the light of exper-
ience from other states we believe a unit method of as-
sessment by central authority, either upon earnings or
value, would be a marked advance over the present sys-
tem. Finally, the system would more nearly approximate
justice if the local revenue from public utilities were ap-
portioned by central authorities to districts, perhaps on
the basis of total trackage found therein.
CHAPTER VIII
THE SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS
There is probably no part of the New York system
of taxation which has been more widely discussed than
the so-called "Ford Special Franchise Tax." Although
Senator John Ford was sponsor for the statute, the person
primarily responsible for its enactment was Theodore
Roosevelt, then Governor of the State. In his first mess-
age to the legislature Governor Roosevelt condemned the
existing system in general terms. 1 In his special message
of March 27, i8gg, 2 he went further, committing himself
to a reform of corporate taxation :
It is true that a corporation which derives its powers from the
state should pay to the state a just percentage of its earnings as a
return for the privileges it enjoys. This should be especially true
for the franchise bestowed upon gas companies, street railways and
the like. The question of municipal ownership of these franchises
cannot be raised with propriety until the governments of all munic-
alities show greater wisdom than has been recently shown in New
York City. ... I need not point out that in foreign communities
a very large percentage of the taxes comes from corporations which
use the public domain for pipes, tracks and the like. Whether these
franchises should be taxed as realty; or whether it would be wiser
to provide that, after the gross earnings equal, say ten per cent of
the actual original cost, then five per cent of all earnings over and
above this shall be paid into the city treasury; or whether some
yet different plan should be tried can only be settled after a careful
examination of the whole subject. One thing is certain, that the
franchise should in some form yield a moneyed return to the gov-
ernment.
1 Governor Roosevelt's Message, Jan. 4, 1899. With regard to
taxation he said in part : "At present our system of taxation is in
utter confusion, full of injustice and queer anomolies We
should discourage the building up of non-taxable interests yet we
should discourage driving property out of the state by unwise taxa-
tion or levying a tax which is in effect largely a tax upon honesty.
I most earnestly commend the whole matter to your special atten-
tion."
2 Governor Roosevelt's Special Message, House Journal, 1899, Vol.
2, p. 186.
151
1 52 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
Governor Roosevelt, in this message, suggested that
there be some general scheme of taxation applying to all
public service companies. He asked for a joint committee
of the senate and assembly to investigate the subject in
full and report to the next legislature. He asked for a
legislative commission because, he said, it had been the
almost universal experience that however excellent the re-
ports made by special non-legislative tax commissions, the
legislatures paid little or no heed to them. Shortly after
this message was made public, Senator Ford introduced
his bill for taxing franchises. The bill passed the Senate
by the vote of 33 to n. Strenuous opposition, however,
developed in the Assembly, and Governor Roosevelt
found it necessary to exert pressure to secure the passage
of the bill. When it seemed on the verge of defeat he
sent the following special message :
It appearing to my satisfaction that the public interests demands
it, therefore in accordance with the provision of section 15, article
3 of the constitution and by virtue of the authority thereby con-
ferred upon me, I do hereby certify to the necessity of the imme-
diate passage of Senate Bill 1102 entitled, An Act to amend the tax
law relating to the taxation of public franchises as real property. 4
This message was not read in the assembly. As soon
as the governor discovered this he sent another special
message :
I learn that the emergency message which I sent last evening to
the assembly on behalf of the franchise tax has not been read. I
therefore send hereby another message upon the subject. I need
not press upon the assembly the need of passing this bill at once.
It has been passed by an overwhelming vote in the senate. A large
majority of the assembly have signed a petition asking that it be
put through. It establishes the principle that hereafter corpora-
tions holding franchises from the public shall pay their just share
of the public burden. It is too late to try to amend or perfect the
bill, even should such amendment or improvement be deemed de-
sirable. It is one of the most important measures (I am tempted
to say the most important measure) that has been before the legis-
lature this year. I cannot too strongly urge its immediate pass-
age. 5
There could be no uncertainty as to the meaning of
this message. On the last day of the session the bill was
4 Roosevelt's Message, April 27, 1899, Public Papers of Governor
Roosevelt, 1899, p. 88.
5 Governor Roosevelt's Message to the Assembly, April 28, 1899,
Public Papers of Governor Roosevelt, 1899, p. 89.
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 153
passed and then came before the Governor for his sig-
nature. Vigorous opposition developed and glaring de-
fects were pointed out. The most weighty objections
were, first, that local assessors could not approximate
equality in assessing franchise and, second, that the addi-
tion of this tax to the special taxes already imposed by
some municipalities on franchise would constitute heavy
double taxation. Governor Roosevelt refused to veto
the bill, thus allowing the matter to wait over until the
next session of the legislature. Instead he called a special
session to secure satisfactory amendments.
When the legislature convened the Governor sent it a
lengthy message dealing with the matter. He reiterated
much that he had said before, and again emphasized the
importance of franchise taxation. He did not intend, he
said, to oppress people who had put their money into the
use of the city's or the state's real estate which made the
franchise valuable. If it were worth little, it should be
taxed little; if of great value it should be heavily taxed.
He was convinced that the opposition to the bill before
him, was directed not so much against its particular fea-
tures as against the general principle of taxing franchises.
Because of the determination of the interests affected to
defeat franchise taxation, he deemed it necessary to se-
cure statuatory recognition of this principle at that session
of the legislature. For this reason he justified his special
message to which its passage was due. The bill as it
stood represented a long stride in the right direction, and
the ground thus gained must be held. In the essential
feature taxing franchises as realty the measure was
right. In two important particulars, however, he asked
for amendment. One was to entrust the work of assess-
ment to the State Board of Tax Commissioners ; the other
was to allow deductions for any franchise taxes paid a
corporation to a municipality or other local unit. A few
companies, he pointed out, already paid in this way as
much as five per cent on gross earnings. 6
That the legislature would adopt the proposed amend-
- Governor Roosevelt's Message, May 22, 1899. Public Papers
of Governor Roosevelt, 1899, p. 102.
1 54 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ments was not a foregone conclusion. Some members of
the legislature, including the author of the bill himself,
objected to the amendments while others resented the use
of executive pressure. Senator R. H. Mitchell probably
expressed the attitude of a member when he said : "The
governor is up against it. He issues an ultimatum to the
legislature defining just what sort of a bill he will accept.
I believe that a majority of the members of the legislature
will go to Albany determined not to do what he demands
just to show him that they, and not he, constitute the law-
making power." 7
But the real question before the legislature was not
merely whether the law would be improved by the pro-
posed amendments. The governor had made it plain that
unless the amended bill were in his hands before May 27,
he would sign the act as it was before him.
The amendments undoubtedly bettered the measure and
and to adopt them seemed the preferable alternative. This
the legislature did May 26, 1899. That the Governor
took upon himself the credit for the measure is plain from
his utterance subsequent to its passage, 8
The provisions of law 9 are substantially as follows.
Under the term land or real estate are included the value
of all franchises, rights or permissions to construct, main-
tain or operate in, under, above or through the streets
highways or public places. Such franchises are, for the
purposes of taxation, to be known as special franchises,
and are further defined so as to include the value of tangi-
ble property situated in such places and used in connection
with a special franchise.
The Board of Tax Commissioners are annually to de-
termine the valuation of each special franchise. They
7 New York Times, May 6, 1899.
8 In a speech at the Johnstown Fair he said : " the men in
the legislature from whom I obtained the most aid in pushing
through the franchise tax act It required boldness of ac-
tion to get it through the legislature, but it could not be passed in
any other way. The qualities of courage, of boldness and of com-
mon sense have got to be shown in passing any real legislative
measure which has to meet a powerful opposition." New York
Tribune, September 7, 1899.
'New York Statutes, 1899, Chap. 712.
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 1 55
must file with the clerk of the assessment district a writ-
ten statement of this valuation, not less than ten nor more
than thirty days before an annual assessment is to be
made. 10 Every company subject to such taxation must,
within thirty days after each franchise is acquired, make
a written report, under oath, to the state board. In the
report is to be a description of the franchise, any obliga-
tion upon it and any other information the board may re-
quire. 11 The board meets at specified times to hear and
determine complaints, with the provision, however, that
such determinations may be reviewed through the courts.
This law, then provides for a tax in addition to any pre-
viously existing tax, to be assessed upon the right to use
a public thoroughfare and upon the fixtures found there-
in. Such property is considered real estate, is to be as-
sessed by the State Board of Tax Commissioners, whose
determinations are subject to court review. The law has
been amended at minor points but its significant features
remain unchanged.
This special franchise tax has been much discussed.
The press was at first generally favorable to franchise
taxation but was inclined to find fault with the Governor's
methods of procedure, and there was not a little satirical
comment on the predicament in which he found himself
when he had forced the passage of a bill which he would
not sign. Public sentiment was against the special ses-
sion ; it was thought that the Governor might better have
vetoed the bill, and permitted the matter to wait over till
the next regular session of the legislature. The special
session was deemed a measure of political expediency,
to save the Governor from the humiliation of having to
veto his own bill. But in its final form the act was given
at the time the almost unanimous approval of the press of
10 The taxing officer of the district must furnish any information
required by the State Board for the purpose of determining the
value of the franchise. A copy of the valuation is to be delivered
by the clerk to the assessors within five days after he receives it
and they are to enter it upon the assessment roll.
11 A penalty of one hundred dollars is imposed for failure to make
any required report and in addition ten dollars per day for each
day the failure continues.
156 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
the state and even of the country. 12 Tammany Hall sent
to the Governor a memorial favoring the bill. 13
One important feature of the law is its definition of
special franchises as "real estate". This provision was
made necessary because of the working of the general tax
law under which corporations were assessed locally. In
the assessments of personalty debts were allowed to be
deducted or "sworn off." Such could not be done, how-
ever, with the assessment of real estate. Under this law
corporations had to a great extent escaped taxation upon
their capital since the part covered by bonds was an in-
debtedness and could properly be deducted. Where the
bonds equaled or exceeded the capital only the real estate
was left to be taxed. Had the special franchise, then,
been designated as personalty, the purpose of the law
would have been defeated to a great extent by the deduct-
ion of bonded indebtedness from the assessment. Sena-
tor Ford emphasized the importance of this feature:
"The main virtue of the bill is that it proposes to tax
these properties as real estate instead of as personalty
that means that whatever tax the assessors levy must be
paid. It cannot be 'sworn off' nor can indebtedness be
offset against it. In other words the possessor of the
"The New York Times may be cited as an exception. From
the beginning it criticised the principle of franchise taxation. The
Commercial and Financial Chronicle took the same attitude as the
Times. To quote from the Chronicle {Public Opinion. Vol. 26:
648) "The difficulty, it seems to us, lies deeper than any general
question of how the law may be applied. The theory on which the
entire measure is constructed is erroneous. A corporation fran-
chise is not real estate and the briefest possible discussion of the
bill has shown into what embarrassment and confusion the tax ad-
ministration will be thrown by insisting upon such classification.
The case simply amounts to this that provisions framed for one
purpose, and peculiarly adapted to that purpose, are suddenly and
without substantial change, applied to something of a wholly differ-
ent nature."
11 New York Times, May 12, 1899. In the memorial it was main-
tained that the bill was intended to remove inequality. It would
reach the corporations who had special privileges taken by right of
eminent domain. These privileges were to be the subject of taxation
and such a law would mark a great advance in the New York system
of taxation. The privileges should be taxed, it argued, since they
are the most valuable part of the corporation property. Without
them the rest of the property would be junk.
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 157
public franchise is placed in the same position, as far as
the tax laws are concerned, as the owner of a house and
lot, which property is taxed regardless of whether it is
producing revenue or not and without regard to the mort-
gage that may be upon it, even though that mortgage
covers eighty per cent of the total value of the proper-
ty." 14
The assessment and valuation of the special franchise
has proved particularly difficult. The law as first passed
by the legislature had left the assessment to local asses-
sors, but in its final form this was given over to the State
Board of Tax Commissioners. Senator Ford opposed the
centralization of assessment, holding that, under a rule
which he suggested, local assessors would have no diffi-
culty in arriving at special franchise valuation. 15 The
law prescribed no particular method of assessment, such
matters being left to the discretion of the tax commission.
Before beginning its work the commission asked the
Attorney General for an opinion as to the method of pro-
cedure. This was given by Mr. J. Newton Fiero, counsel
designated for the purpose, September 28, 1899.
The purpose of the act, he thought, was to subject cer-
tain classes of franchises, and those only, to assessment ;
it did not give the right to assess a corporation for the
privilege of exercising its right to exist as such, or for
its good-will, or on the choice or conduct of its business.
He reviewed the New York court decisions relating to
the valuation of corporate property and franchises as well
as the systems of valuation used by other states. Some
of these, he pointed out, would be in harmony with New
York decisions.
He concluded that the practical and practicable method
of arriving at the entire value of assets with a view to
assessing the special franchise necessitated a considera-
tion of the cost of the real estate, and of the earning ca-
pacity of the property as a whole. As elements going to
14 New York Times, April 30, 1899.
18 The rule suggested by Senator Ford was practically the stock
and bond method of valuation. The difference between the value
of the stock and bonds, and the reproduction cost of tangible as-
sets would represent the value of the public and special franchises.
1 58 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
make up such values by showing earning capacity, the
value of the capital stock, surplus, and bonded indebted-
ness must also be considered. In addition all circumstan-
ces which tend to enhance or depreciate the value of cor-
porate property had to be taken into account. A consid-
eration of such factors, modified in each case to suit the
circumstances, would give the value of the entire corpo-
rate property.
When this value is determined, however, the problem
is by no means solved. The only assessment to be made
was of the "special franchise" together with the "value
of the tangible property" used in direct connection with
it. Obviously deductions from the entire corporate value
were necessary. Indebtedness could not be allowed to
lessen the assessment since the special franchises were
classed as real estate, from which deductions of indebted-
ness were not permitted. Real estate, however, which
was not included in the statuatory definition could not be
assessed as a part of the special franchise, and its value
must be deducted from the entire value of the corpora-
tion's property and franchises. The value of the tangi-
ble and personal property, likewise, it was necessary to
deduct. Besides these items the general franchise to be
a corporation had a distinct value, as well as the choice,
conduct, and good will of the business which values could
not be included in the special franchise. In short, all the
property which did not come within the definition of a
special franchise must be deducted from the total valu-
ation.
From these considerations he concluded that "the value
of a 'special franchise/ therefore, is arrived at by ascer-
taining the value of the entire corporate property, taking
into consideration all the elements which go to make up
such value, and deducting therefrom the value of the per-
sonal property of the corporation, of so much of the real
estate as is not connected with the special franchise, and
of the franchises not affected by this amendment, in fine,
by deducting from the total value of corporate assets all
the intangible and tangible property not part of, or con-
nected with, the special franchise."
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 159
Mr. Fiero admitted, in the conclusion of his report,
the leeway the proposed method left to the tax commis-
sioners, particularly in determining the value of the good
will, conduct of the business, franchise to be a corpora-
tion, and the value of the intangible franchise not tax-
able. It was impossible, he thought, to adopt rigid rules
of valuation for property the value of which depended
on so great a variety of elements. Such rules could only
be general in character and must be subject to modifica-
tion in individual cases. Because of the wide discretion
necessarily vested in the assessing officers, absolute cer-
tainty in values would not be possible.
The Board of Tax Commissioners had to contend at
first with many difficulties, and to encounter much criti-
cism. Frequent inquiries were made as to what rule was
followed in making a special franchise assessment and
the reply that it was impossible to use any one rule was
naturally not deemed satisfactory. The Board, in fact,
found it next to impossible to perform the duties requir-
ed of it. The task of placing a value upon every rail-
road and trolley crossing, and every use of the streets
and highways by other public service corporations in-
volved an enormous amount of labor. In order to facili-
tate assessments the legislature, at the request of the
board, eliminated from the special franchise class all uses
of public thoroughfares less than 250 feet in length. 18
This reduced the number of special franchise assessments
by about noo and the valuation by more than $10,000,-
ooo. But it was not long before the Tax Commissioners
pointed out the enormous value attached to short cross-
ings in populous centers, and asked that the amendment
be modified. The 250 feet exemption reduced the rev-
enue and involved an unjust discrimination. 17 The leg-
islature accordingly included in special franchises all uses
of public thoroughfares in cities and incorporated villages
and placed the assessment under the jurisdiction of the
State Tax Commissioners. 18
"New York Statutes, 1901, Chap. 490.
"Annual Report of Board of State Tax Commissioners, 1906.
18 New York Statutes, 1907, Chap. 720.
160 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
In spite of the difficulties in administering the tax, the
commissioners approved it as a matter of justice and as
a source of increased public revenues. Valuations of
corporate properties were greatly increased. The total
value placed upon the special franchises of New York
City at the first assessment was nearly $290,000,000
The special franchises of some individual companies are
found tf> be enormously valuable. For the Metropolitan
Street Railway system this value was over $55,000,000;
for the Consolidated Gas Company, over $10,000,000; for
the Third Avenue Street Railway system over $17,000,-
ooo. General approval, of course, attended such results
of the law.
This statute, however, has been the cause of an enor-
mous amount of litigation. Values were, of necessity,
arbitrarily determined ,and this opened the door for com-
plaints. The constutionality of the law was first attacked.
In 1903 the Court of Appeals defined a special franchise
as "the right granted to a corporation to construct, min-
tain or operate, in a public highway, some structure in-
tended for public use, which, except for the grant, would
be a trespass/' It was contended that the home-rule
provision of the constitution 19 was violated by placing
the assessment of special franchises in the hands of the
State Tax Commissioners. This contention was reject-
ed by the court, which held that the statute created a new
system of taxation, and brought within its range a new
character of property which required new methods of val-
uation. With this the exercise of new functions arose
which had never belonged to local assessors. The func-
tions were properly committed to state officers whose
"Article 10, Section 2. This provides that "all city, town and
village officers, whose election and appointment is not provided for
by this constitution, shall be elected by the electors of such cities,
towns, and villages, or of some subdivision thereof, or appointed by
such authorities thereof, as the legislature shall designate for that
purpose." The court held that when this provision was invoked in
relation to taxation it should be considered in connection with the
supreme taxing power of the legislature and neither should be con-
strued so as to embarrass or cripple the other. The right to create
a new system of taxation and bring in property of a new character
could not be decried upon this principle and should not be withheld
from the legislature.
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 161
duty related to the subject of taxation in all its phases
throughout the entire state and who, with wider experience
and greater opportunities for observation than local asses-
sors, would be able to grasp the new scheme of taxation
as a whole. Such action, moreover, would be free from
all local prejudices of color. Other contentions, to the
effect that the act was impracticable and incapable of
execution, and that this was evidenced by the failure of
the commissioners to adopt a definite rule in making the
assessment, were likewise overruled. 20
A number of cases involving the methods used in making
the assessments have come before the courts. That of the
Jamaica Water Supply Company was the most important.
We have already noted the method suggested by the court
for valuing corporate property. 21 The net earnings basis,
it will be remembered, was adopted. To determine the
value of a special franchise the court would have the
assessors first deduct operating expenses from gross earn-
ings. A reasonable return upon the portion of the capi-
tal invested in tangible property was also to be deducted.
The capitalized remainder would represent the value to
be attributed to the special franchise. Taxes, except the
special franchise tax, were to be deducted from gross
earnings in determining net earnings as well as a proper
amount of depreciation. In absence of evidence to the
contrary, six per cent was to be taken as a fair rate of
return in calculating the value of a special franchise.
The court recognized that the rule was not infallible, but
thought it could be generally applied. If the calculations
left no value for the special franchise, it would be con-
clusive reason for rejecting the net earnings rule and
would demand the adoption of some other method of val-
uation.
It appears, that in laying down this rule, the court took
no account of the fact that other franchise values besides
the special franchise have to be reckoned with. The other
franchises, to be sure, are not taxed locally yet the total
20 Metropolitan Street Railway Company vs Tax Commissioners.
174 N. Y, 417. Affirmed 199 U. S. f 1.
31 Jamaica Water Supply Company vs Tax Commissioners, 196
N. Y. 39. See preceding chapter, p. 134.
162 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
value of all franchises cannot properly be imputed to the
so-called special franchises. The rule suggested gives at
best merely the whole franchise value and suggestes no
scheme by which the assessment can be divided into sums
representing the values of the different kinds of franchises.
Neither does it suggest any method by which the value
of one special franchise may be separated from the value
of other special franchises. A railroad company, for ex-
ample, may have special franchises in a number of tax
districts and it is necessary to assign separate values to
the franchises in each district. It would seem, then, that
the suggested rule fails to solve the problem of special
franchise assessment, and that as much leeway as before
is left to the tax commissioners.
Judge Blackmar, in a later case, 22 discounted the im-
portance of the net-earnings rule in special franchise val-
uations. He admitted, of course, that the most important
single element in determining the value of a special fran-
chise is the earning capacity of the company. But no
thoughtful appraiser, he held, would deem the results of
the business for a single year conclusive without a con-
sideration of many other matters. The real value of a
special franchise does not depend upon what it does earn,
but upon what it can be made to earn. This would be
the way a person who contemplated purchase would val-
ue it. Here, then, we have another basis, one which the
judge himself characterizes as attended by too many com-
plications to be of direct practical use. This factor, how-
ever, he thought should be given due weight. That none
of the methods used were altogether satisfactory is indi-
cated by the number of cases that continued to come be-
fore the courts.
The corporations were severely, and perhaps unfairly,
criticized for contesting the law. The Independent at-
tributed the opposition of the "interests" to Roosevelt's
second term as governor to this law. "But his franchise
tax law," it said, "was so strongly affirmed that it could
not be shaken, and efforts to escape its requirements will
22 Queens County Water Company vs Woodbury, 67 Miscellan-
eous, 490.
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 163
do the companies more harm than good. The tax is
clearly a just one. Great quantities of stock and bonds
have been issued upon franchise privileges rather than
upon actual cash. By means of such manipulation large
fortunes have been acquired." To such practices it at-
tributed the clamor for municipal ownership of public
utilities. 23 Such were the opinions of the press generally,
which seems to have endorsed Roosevelt's statement that
the principle had come to stay. Governor Odell, however,
favored the repeal of the law because of its indefiniteness
and the consequent litigation. He recommended the
gross earnings tax as a substitute. 24
One obvious defect in the law was its failure to pro-
vide for the equalization of assessments, which had to be
made by the board at full value. In the Jamaica Water
Supply Company case, cited above, the court held that
the State Board of Tax Commissioners had no power
to reduce the value of a special franchise for purposes
of equalization. Reduction could only be made by the
courts where such property had been assessed at higher
proportionate value than other property on the same tax
roll.
During the first eight years that the law was on the
books, less than half the taxes due on special franchise
assessments were paid, pending the outcome of legisla-
tion. The Tax Commissioners had from the first asked
for the power of equalization and the Court of Appeals
had recommended that such power be conferred. The
State Conference on Taxation held in Utica in 1911
unanimously adopted a resolution recommending the
equalization of special franchise assessments by the State
Board. Governor Dix in his message of 1911 referred
to the enormous amount of litigation and asked for an
amendment that would permit the tax commissioners to
make an equalized assessment. Such an amendment to
the law was finally passed in 191 1. 25 The State Board
23 The Independent, May 7, 1903.
M Governor Odell's message to the Legislature, 1903, Public Papers
of Governor Odell, 1903, p. 12.
25 New York Statutes, 1911, Chap. 804.
164 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
DOW attempts to equalize special franchise assessments
with real estate assessments in each district.
In 1911, 975 writs of certiorari were taken out in the
courts for the review of special franchise assessments.
In the following year, with the amendement in force, the
number fell to 212. But this number is so large as to
indicate that the operation of the law is still far from sat-
isfactory. Cities and towns have begun action in cases
where they thought the Commissioners under their equal-
ization powers had unduly reduced special franchise val-
ues. The possibility of inequality still exists in the at-
temp to equalize the special franchise value to the per-
centage which the assessed value of other real property
in each district bears to its full value. It is difficult for
the commissioners to determine just what is the relation
between the assessed and full value of other real prop-
erty in the various districts.
The board of tax commissioners expressed the hope
that the equalizing of the special franchise valuations
would largely aid in bringing local assessments of real
property up to the full value standard. The reduction of
the special franchise valuations 26 brought forcibly to the
attention of the people the rate at which real property
was generally being assessed, and the loss that came to
the particular tax district by reason of assessments being
lower than full value. When an adequate force of ap-
praisers was supplied, the Board expected to be in pos-
session of sufficient information to make plain to the as-
sessors the extent to which they were violating the law.
The Commissioners recognized that the assessments in
many localities were unequal, but they lacked positive
proof of such inequality and undervaluation.
Taken as a whole, the statute has proved in operation
to be one of the most arbitrary and complicated parts of
New York's already far too complex system of taxation.
The different methods and "rules" suggested for valuing
the franchises, and the admitted impossibility of framing
"As given by the tax commissioners in their report for 1912, the
total valuation of special franchise for 1912 was $601,988,675 and
the equalized valuation was $533,790.692.
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 165
a "rule" fitting all cases, points to the conclusion that the
fair and equitable assessment of special franchises is an
impossibility. The net earnings basis of valuation and
its difficulties have been discussed in the previous chap-
ter. Just what are net earnings ? What shall be allowed
for expenses in each case, and how shall the rate of capi-
talization vary for the companies operating under differ-
ent conditions of hazard? What has been the character
of the management in this or that particular case and
what allowance must be made for managerial ability in
making the assessments? Railroads in the streets are a
greater hinderance to public use than are gas mains, tel-
ephone conduits, etc., and yet there are many cases in
which larger profits must be imputed to the latter. Are
the commissioners to use the same rule and basis of cap-
italization for all companies? How much of the earn-
ings is to be attributed to property located outside the
streets? Are the prices which some corporations pay
municipalities for their franchises, either in a lump sum
or annually, to be taken into consideration? What part
shall the fee value of the land itself occupied in the
streets have in the assessment ? What place must be given
to the possibility for future earnings? How determine
the value to a railroad company of the right to cross the
street in a country village of 1000 population?
Problems such as the above questions suggest and
many others arise under the application of the law, and
with a slightly different application in each case. And
when we consider that there are nearly 8000 special fran-
chises annually to be assessed and equalized with the as-
sessed value of other real estate in the district where the
franchise is situated, we must grant the utter impossibility
of satisfactory results. Instead of making the tax sys-
tem more simple and uniform, as had been urged by the
reformers, it has piled complexity upon complexity. It
has increased revenues in some places, but at a waste of
time and money in administration and litigation. And
all this has not afforded uniform and just treatment to
the corporations, for under the statute it is virtually im-
possible to treat all alike. The assessment must be arbi-
166 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
trary and the companies have no way of knowing in ad-
vance how much their taxes will be. It also increases
the burdens connected with the mere payment of the
taxes. That such burdens are not inconsiderable is shown
by the fact that some corporations pay as many as 5000
separate tax bills.
But was there really no justification for the measure?
It was, of course, an attempt to make the property basis
of taxation more adequate in reaching corporate value.
The people saw companies which held gratuitous long-
time or perpetual franchises and from which they were
coining money, and on which they were paying little or
nothing in taxes. The very idea of the public franchise,
in so far as it means a franchise to serve the public, seem-
ed to be forgotten, and the idea that such a franchise
conferred the right to exploit the public seemed to be in
vogue. And in a number of cases there were facts which
went far to justify such an interpretation of the situation.
It was to have been expected, of course, that franchises
granted by the public without special safeguards for the
public interests would be exploited as they were. When
the people realized the value of these special grants and
sought to correct the evil they had brought upon them-
selves, no weapon seemed so readily available as taxation.
If the special franchise tax cauld be made to take the
earnings of exploitation and be kept uniform and fair
in its application, there could be little objection to it. But
even though we justify the special franchise tax as an
attempt to take the "earnings of privilege," the difficulties
are not cleared away. It still remains to account for the
"additional franchise taxes" upon the gross earnings and
dividends of some classes of public service corporations.
Then, too, the inadequacy of the annual franchise tax
to reach intangible values, in the cases where it applies,
must be explained.
The modern interpretation of the idea covered by the
term "public franchise" is not that the franchise gives a
corporation the right to use public property for the pur-
pose of gaining an income from it. It is rather a priv-
ilege granted to the corporation to use such property in
SPECIAL TAXATION OF PUBLIC SERVICE CORPORATIONS 167
rendering a public service. The service is not expected
to be rendered without compensation and the public must
allow a reasonable return on the capital used to render
such services, but not on the value of a free gift from the
public. A public franchise cannot be capitalized against
the public. But, in fact, many corporations were getting
more than the public was willing to allow and the tax-
ation of surplus profits was the first remedy hit upon.
More recently, however, a better and saner method of
establishing just relations between the public and the cor-
porations has been introduced. This is regulation by a
public service commission. This commission has the
board powers of deciding upon a fair return on capital
invested, quality of service, and the rates to be charged.
Under regulation the values now represented by special
franchises tend to disappear. If regulation were perfect
there would be no special franchise values. Since it can
thus deal with the use of franchises, the question of tax-
ation resolves itself into this : are public service corpo-
rations to be viewed as existing for the benefit of the
users, the community viewed as a body of taxpayers, or
both? If for the former then the commission will require
low rates, and there will be nothing left (over a fair re-
turn) for taxes; if 'for the state, then higher rates with
some curtailment in the use of the utility; if for both,
moderate rates with only a moderate surplus for taxes.
Under a system of perfect regulation there is no doubt
that, if the public service corporation pays a tax, it mere-
ly acts as a collector of that tax from the public. The net
earnings of a company must be large enough to allow a
fair return. In ascertaining the net earnings, taxes, along
with the operating expenses, are deducted from gross re-
ceipts. If there were no tax the total income of the com-
pany could be reduced by the amount of the tax and their
net earnings remain unchanged. With the tax the charge
for service must be such as to allow a fair return after
its deduction from gross receipts. 27 For this reason many
"This is only necessarily true under regulation. A tax imposed
upon a monopoly where prices were fixed so as to bring the highest
net return might have no effect, or one not in proportion to the tax,
on the price charged for the service. Rates would still be such as
168 DEVELOPM ENT OF CORPORATION TAXATION, STATE OF NEW YORK
persons now favor the abolition of special taxes upon pub-
lic utility corporations for these increase the burden upon
the consumer of the service. Such taxes are, more or
less, according to the utility in question, a burden upon
a particular class. A tax upon street railways, for ex-
ample would be borne in large part by the middle and
lower classes. In the case of some other utilities, steam
heat or gas, for example, the opposite may be more nearly
true.
Because of the necessary burden a tax places upon the
consumer of a public utility service, some have advocated
the entire abolition of taxes upon this class of enterprises.
Such action would secure cheaper services but at a high-
er tax upon other assessable property. It would practi-
cally amount to shifting such tax to the owners of other
property.
Under regulation, public utility property becomes much
like other property so far as a means for raising revenue
is concerned. It is property yielding a fair return, and
so should neither be freed from taxes nor have special
taxes applied to it. The most logical and just method of
procedure, it would seem, would be to tax such property
valuations to the same extent that other property is tax-
ed, and in such a way as to equalize the burdens on this
class of property and other property. The proceeds could
be applied to the needs of the state, the locality, or both.
Such a tax, however, should not be assessed under the
guise of a special franchise tax, for this has proved com-
plex and confusing. We conclude, as in the preceding
chapter, that the present system should be simplified into
some uniform tax, assessed by a central board. Some in-
equalities, no doubt, would exist until proper regulation
and assessment is secured. Such, however, would tend to
disappear with time and experience. Simplicity would at
least be secured and no greater injustice or inequalities
would be incurred than exist at present.
to bring the largest net return to the company, and it is possible
they would remain the same as before the tax was imposed.
CHAPTR IX.
SUMMARY OF NEW YORK LAWS TAXING CORPORATIONS.
I. FOR STATE PURPOSES.
A DOMESTIC CORPORATIONS.
ORGANIZATION TAXES (Section 180) Every stock cor-
poration incorporated under any state law must pay a tax
of one-twentieth of one per cent upon the authorized cap-
ital stock. A like tax is imposed upon any subsequent
increase of capital stock. The minimum tax is five dol-
lars. Banks, building, mutual loan, accumulative fund
and co-operative associations are exempt from the tax.
Railroads need not pay when incorporated but must pay
before they receive a certificate from the public service
commission. In case of consolidation the tax must be
paid only on the capital in excess of the amount which
has previously borne the tax.
ANNUAL FRANCHISE TAX. (Section 182) Every cor-
poration, joint stock company, and association, for the
privilege of exercising its corporate franchise, must pay
an annual tax on the amount of capital employed within
the state during the preceding year. The amount of stock
employed within the is the same proportion of
the issued stock as the gross assets employed in the state
bear to the entire gross assets. If the dividends amount
to six or more per cent upon the par value of the stock the
tax is one-fourth mill for each per cent of dividend so de-
clared.
If the dividends amount to less than six per cent and
(a) the assets do not exceed liabilities, exclusive of cap-
ital stock, or (b) the average price at which the stock
sold did not equal or exceed par, or (c) if no dividends
were declared, the tax is three-fourths mill per dollar on
capital employed in the state. If the dividends have been
169
170 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
less than six per cent and (a) the assets exceed liabilities
exclusive of capital stock, by as much as the par value of
the stock or (b) the average selling price of the stock
during the year was as much as par, the tax on capital
employed in the state is one and one-half mills per dollar.
The valuation of the capital cannot be less than (a) the
par value of the stock, (b) the difference between assets
and liabilities, exclusive of capital stock, or (c) the aver-
age price at which the stock sold during the year. Where
there are two kinds of stock paying dividends at different
rates, each kind of stock is taxed as if it were the only
taxable stock. Any corporation not taxable under the
above provisions is taxed not less than would be produced
by a tax of one and one-half mills per dollar on the actual
value of the capital stock employed in the state or on the
average price at which stock sold during the year.
Some corporations are exempt from the annual fran-
chise tax. (Section 183) These are banks, savings banks,
institutions for savings, title guaranty, insurance or sure-
ty corporations and trust companies. Laundering,
manufacturing and mining companies are exempt if at
least forty per cent of the capital stock is invested in prop-
erty in the state and used in laundering, manufacturing
or mining business. Agricultural and horticultural as-
sociations and companies owning or operating elevated
railroads, surface roads not operated by steam, and com-
panies formed for supplying water or gas, for electric or
steam heating, lighting and power purposes are also ex-
empt from the tax.
ADDITIONAL FRANCHISE TAX : (Section 184) All steam
surface railroad companies and all canal, steamboat, ferry,
express, navigation, pipe line, transfer baggage express,
telegraph, telephone, and palace or sleeping car compan-
ies must pay an annual excise tax or license fee of five
tenths of one per cent upon gross earnings within the
state. The earnings considered are those arising from
business originating and terminating within the state.
Earnings from interestate commerce are therefore exclud-
ed. Ferry companies operating between the boroughs of
SUMMARY NEW YORK LAWS TAXING CORPORATIONS 171
New York city under a city lease are not subject to the
tax.
OTHER TAXES ON TRANSPORTATION AND TRANSMIS-
SION COMPANIES: (Section 185 and 186) Companies
owning or operating elevated railroads or surface roads
not operated by steam must pay an annual tax of one per
cent on gross earnings derived from all sources within
the state. In addition they must pay three per cent upon
the amount of dividends declared or paid in excess of four
per cent on the actual amount of paid up capital employed.
Companies formed for supplying water and gas or for
electric or steam heating, lighting or power purposes,
must pay an annual tax of five-tenths of one per cent on
gross earnings derived within the state. Besides this
they must pay a tax of three per cent upon the dividends
declared in excess of four per cent on the actual amount
of paid up capital.
INSURANCE COMPANIES: (Section 187) All insurance
companies organized or formed under a general or special
law of the state must pay a tax of one per cent on the
gross amount of premiums received during the year. The
gross premiums include all premiums received on all poli-
cies, certificates, renewals, policies subsequently canceled,
insurance and reinsurance during the preceding year, and
on all policies issued in all years prior to the preceding
year.
TRUST COMPANIES AND SAVINGS BANKS: (Section 188
and 189) Every trust company operating under any law of
the state must pay for the privilege of carrying on its
business in such organized capacity an annual tax of one
per cent on the amount of its capital stock, surplus and un-
divided profits. Savings banks must pay for the privilege
of exercising corporate form, an annual tax of one per
cent on the par value of surplus and undivided earnings.
STOCK TRANSFER TAX: (Section 270) A tax of two
cents on every $100 face value is imposed on all sales or
agreements to sell or memoranda of sales of stock. The
person making the sale must affix and cancel the stamps
to pay the tax. Stamps are prepared by the State Comp-
1 72 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
troller and their sale is limited to banks organized under
the New York laws, under the national banking act or to
a duly authorized agent of the Comptroller. Penalties
are imposed for failure to pay the tax, failure to cancel
stamps, illegal use of stamps and for failure to register.
B. FOREIGN CORPORATIONS
LICENSE TAX: (Section 181) Foreign Corporations,
for the privilege of carrying on business in a corporate
capacity in the state must pay a license fee of one-eighth
of one per cent on the amount of capital stock employed
within the state during the first year of carrying on busi-
ness. Any subsequent increase of capital employed in the
state is subject to the tax. The amount of capital employ-
ed in the state is taken to be such part of the issued capital
stock as the gross assets employed in any business within
the state bear to the total gross assets. The State Tax
Commission fixes the amount of capital upon which the
tax is to be paid. Banking corporations, fire, marine,
casulty and life insurance companies, co-operative fra-
ternal insurance companies and building and loan associa-
tions are exempt from the tax.
ANNUAL FRANCHISE TAX: (Section 182) Foreign
corporations pay the annual franchise tax on the amount
of capital employed in the state. The tax is computed in
the same way as the tax on domestic corporations. The
amount of the stock upon which to compute the tax is de-
termined by the proportion of assets found in the state.
FOREIGN INSURANCE COMPANIES: (Section 187) All
insurance companies formed under laws of any other
state of the United States, except fire and marine insur-
surance companies, pay one per cent of the gross amount
of annual premiums. All insurance companies organized
under laws of foreign countries, except those doing a life
health or casulty business, pay one per cent on the gross
amount of annual premiums. The tax on fire and marine
insurance companies organized under the laws of a for-
eign country, however, is five-tenths of one per cent of
the annual premiums. If any state imposes heavier taxes
SUMMARY NEW YORK LAWS TAXING CORPORATIONS 173
upon a New York company than normally imposed
in New York, companies from that state are taxed to the
same extent as are New York companies during business
there.
TAX UPON FOREIGN BANKERS: (Section 191) Every
foreign banker doing business in the state is required to
pay an annual tax of five per cent on the amount of inter-
est or compensation earned or collected on money loaned,
used or employed in the state.
OTHER TAXES FOR STATE PURPOSES: All companies
paying the above taxes , except the organization tax, are
exempt from assessment and taxation upon their personal
property for state purposes. (Section 205) Since there is
a small directly apportioned tax for state purposes a part
of this falls upon corporations since their real estate is
legally assessed for state purposes. Very little personal
property is assessed since proision is made only for plac-
ing real estate and capital stock on the assessment roll. Ac-
cording to the statute none of the locally collected tax.
except real estate taxes, could be taken for state purposes.
II. FOR LOCAL PURPOSES
(Sections n and 12) Real estate and personal prop-
erty of corporations is to be assessed and taxed by local
assessors. Real estate is taxed at situs while personal
property is taxed at the place of the principal office. In
the instructions for making out the assessment roll, how-
ever, provision is made only for placing on the roll real
estate and capital stock.
TAXATION OF BANKS: (Section 24) Bank shares are
to be assessed to the holder at the place where the bank
is located. The assessment and taxation is not to be at
a greater rate than is made or assessed on moneyed capi-
tal in the hands of individual citizens of the state. The
value of shares is found by adding together the amount
of the capital stock, surplus and undivided profits and
dividing the result by the number of outstanding shares.
When a bank is in liquidation the value is found by divid-
1 74 DEVELOPMENT OF CORPORATION TAXATION, STATE OF NEW YORK
ing the actual assets by the number of shares. Individual
bankers must report the amount of capital invested in the
business and have it assessed as personal property. The
tax upon bank shares is one per cent of the value. No
deduction is allowed for the personal indebtedness of the
share holders.
SPECIAL FRANCHISE: (Sections 43-49) The use of
public property to the extent of 250 feet or more in
length, and any use in a city or incorporated village, is
assessed and taxed as real estate. Valuations are made
and equalized by the State Board of Tax Commissioners.
Taxes which companies already pay for the use of public
property are deducted from special franchise assessments.
175
A PARTIAL LIST OF SOURCES USED IN PREPARING
THIS THESIS.
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Annual Reports of New York State Assessors and State Board
of Tax Commissioners, 1873-1915.
Annual Reports of Commissioner of Taxes and Assessments of
New York City, 1877-1915.
Annual Reports of New York Superintendent of Banks, 1875-
1905.
Annual Reports of New York State Attorney General, 1880-
1915.
Annual Reports of New York Tax Reform Association.
Adams, T. S. Address before the Association of Life Insur-
ance Presidents, Chicago, 1910.
Andrews. Speech before the Ways and Means Committee, Oct.
6, 1874.
Coleman. Special Franchise Taxation in New York. State and
Local Taxation, I. 649.
Corbin. Taxation of Mercantile and Manufacturing Corpora-
tions. State and Local Taxation, III, 309.
Cowdin. Speech in Assembly, April 11, 1877. (Reprint.)
Cox. Taxation of Life Insurance Companies in the United
States. State and Local Taxation, II, 363.
Dryden. Addresses and Papers on Life Insurance and Other
Subjects. Newark, N. J. 1909.
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Conference on Taxation, Buffalo, 1901, 52.
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Local Taxation, V, 193.
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Conference on Taxation, Buffalo, 1902, 55.
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Ford. Municipal Government in the United States. North
American Review, Vol. 172, 861.
Fryer. The Excessive Taxation of Insurance Companies. Nat-
ional Conference on Taxation, Buffalo, 1901. 170.
Hall. The Special Franchise Tax. First New York Conference
on Taxation. 177.
Hoffman. Taxation of Life Insurance Interests. National Con-
ference on Taxation, Buffalo, 1901. 146.
176
Holcomb. The Assessment of Public Service Corporations.
State and Local Taxation, V, 149.
Huebner. Taxation of Life Insurance Companies. State and
Local Taxation. I, 595.
Judson. Taxation of Quasi Public Corporations. Publications
of American Economic Association. 1901. 101.
Kernan. Assessment of Manufacturing Corporations. First
New York Conference on Taxation. 110.
LeBoeuf. Corporate Tax Problems. Fourth New York Con-
ference on Taxation. 342.
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Local Taxation. II, 477.
New York Statutes, 1802-1915.
New York Court of Appeals Decisions.
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I, 149.
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Local Taxation. I, 635.
Report of New York Special Tax Commission, 1871.
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Report of the New York Special Tax Commission. 1900.
Report of the Joint Legislative Committee Taxation of the
State of New York. 1916.
Reports of the Wisconsin Tax Commission. 1898-1910.
Report of the New York Public Service Commission. Second
District. 1913. Vol. III.
Report of the Connecticut Special Commission on Taxation of
Corporations. 1913.
Report of Virginia Joint Committee on Tax Revision. 1914.
Report cf Nebraska Special Commission on Revision in Taxa-
tion. 1914.
Report of Michigan Commission of Inquiry into Taxation, 1911.
Schwab. History of New York Property Tax Publications of
American Economic Association. Vol. V.
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Seligman. Assessment and Taxation of Corporations. First
New York Conference on Taxation. 198.
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Reviews. Vol. 29, 516.
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177
Shields. Railway Taxation. State and Local Taxation. II, 263.
Shields. Railroad Taxation Problems. State and Local Taxa-
tion. IV, 231.
Shortt. Taxation of Public Service Corporations. State and
Local Taxation. I, 622.
Smith. State Systems of Corporate Taxation. State and Local
Taxation. V, 139.
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1914.
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Fourth New York Conference on Taxation. 322.
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and Local Taxation. I, 605.
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of Political and Social Science. September, 1907.
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York. State and Local Taxation.
The Outlook. May 5, 1906.
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The Nation. February 1, 1900.
United States Supreme Court Decisions.
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York, 1912.
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Association of Life Insurance Presidents. New York, 1908.
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