§ 539. Taxation of Intangible Personal Property.

Whereas, with reference to the taxation of tangible personal property, the practice has been to determine its situs by its actual location, with respect to intangible personalty, the principle of mobilia sequuntur personam has generally, though as we shall presently see, not always been applied.

In Union Refrigerator Transit Co. v. Kentucky43 the court say: There is an obvious distinction between tangible and intangible property, in the fact that the latter is held secretly; that there is no method by which its existence or ownership can be ascertained in the State of its situs except, perhaps, in the case of mortgages or shares of stock. So if the owner be discovered, there is no way by which he can be reached by process in a State other than that of his domicile, or the collection of the tax otherwise enforced. In this class of cases the tendency of modern authorities is to apply the maxim mobilia sequuntur personam, and to hold that the property may be taxed at the domicile of the owner as the real situs of the debt, and also, more particularly in the case of mortgages, in the State where the property is retained. Such have been the repeated rulings of this court."

44

§ 540. Doctrine of State Tax on Foreign-Held Bonds Case. However, in the case of State Tax on Foreign-Held Bonds," decided in 1873, was laid down a rule which, if strictly adhered to, would have greatly embarrassed the 'States in their attempts to tax intangible personal property. In this case it was declared that bonds and other evidences of indebtedness are property in the hands of the holders, and, when held by non-residents of the State in which issued, are property beyond the jurisdiction of, and therefore not taxable by, that State. The law contested in this case had required that a railroad company should, before the payment of the interest on certain of its bonds, retain out therefrom the amount of the tax and pay it over to the State. By this direction, it was held, the law operated to impair the obligation

43 199 U. S. 194; 26 Sup. Ct. Rep. 714; 50 L. ed. 1155.

44 15 Wall. 300; 21 L. ed. 179.

of the contract between the company and its non-resident bondholders. And the court held that it was such an impairment because it was not a proper exercise of the taxing power, the court saying: "The bonds issued by the Railway Company in this case are undoubtedly property, but property in the hands of the holders, not property of the obligors. So far as they are held by non-residents of the State, they are property beyond the jurisdiction of the State. The law which requires the treasurer of the company to retain five per cent. of the interest due to the nonresident bondholder is not, therefore, a legitimate exercise of the taxing power. It is a law which interferes between the company and the bondholder, and under pretense of levying a tax commands the company to withhold a portion of the stipulated interest and pay it over to the State. It is a law which thus impairs the obligation of the contract between the parties."

The reasoning by which the court reached the doctrine that the bond in the hands of non-resident bondholders was property without the jurisdiction of the State is given in the note below.45

45" Corporations may be taxed, like natural persons, upon their property and business. But debts owing by corporations, like debts owing by individuals, are not property of the debtors in any sense; they are obligations of the debtors, and only possess value in the hands of the creditors. With them they are property, and in their hands they may be taxed. To call debts property of the debtors, is simply to misuse terms. All the property there can be, in the nature of things, in debts of corporations, belongs to the creditors, to whom they are payable, and follows their domicile, wherever that may be. Their debts can have no locality separate from the parties to whom they are due. This principle might be stated in many different ways, and supported by citations in numerous adjudications, but no number of authori ties and no forms of expression could add anything to its obvious truth, which is recognized upon its simple statement. The property mortgaged belonged entirely to the Company, and so far as it was situated in Pennsylvania was taxable there. If taxation is the correlative of protection, the taxes which it there paid were the correlative for the protection which it there received. And neither the taxation of the property, nor its protection, was augmented or diminished by the fact that the Corporation was in debt or free from debt. The property in no sense belonged to the non-resident bondholder or to the mortgagee of the Company. The mortgage transferred no title; it created only a lien upon the property. Though in form a conveyance, it was both at law and in equity a mere security for the debt.

"Such being the character of a mortgage in Pennsylvania, it cannot be said,

The principles thus broadly laid down in the State Tax on Foreign-Held Bonds had soon to be modified, and, in fact, the case has since been held down to the precise point decided. That public securities, consisting of state bonds and bonds of municipal corporations and circulating notes of banking institutions are exempted from the principle mobilia sequuntur personam, is stated in the case itself. But in later. cases the same exemption is applied to shares of stock, mortgages, and, to a certain extent, to promissory notes and other credits. This will appear in the sections which follow.

§ 541. Taxation of Shares of Stock.

Shares of stock in incorporated companies may be viewed either as property in the hands of their holders or as representing the property of the company. Thus they are viewed in the latter light when their value is taken as measuring the value of the property of the company for the purposes of a property tax upon that company. In such cases, as we have seen, tangible property of the company permanently located outside of the State may not be as was justly observed by counsel, that the non-resident holder and owner of a bond secured by a mortgage in that State owns any real estate there. A mortgage being there a mere chose in action, it only confers upon the holder, or the party for whose benefit the mortgage is given, a right to proceed against the property mortgaged, upon a given contingency, to enforce, by its sale, the payment of his demand. This right has no locality independent of the party in whom it resides. It may undoubtedly be taxed by the State when held by a resident therein, but when held by a non-resident it is as much beyond the jurisdiction of the State as the person of the owner.

"It is undoubtedly true that the actual situs of personal property which has a visible and tangible existence, and not the domicile of its owner, will, in many cases, determine the State in which it may be taxed. The same thing is true of public securities consisting of state bonds and bonds of municipal bodies, and circulating notes of banking institutions; the former, by general usage, have acquired the character of and are treated as property, in the place where they are found, though removed from the domicile of the owner; the latter are treated and pass as money wherever they are. But other personal property, consisting of bonds, mortgages, and debts generally, has no situs independent of the domicile of the owner, and certainly can have none where the instruments, as in the present case, constituting the evidence of debt, are not separated from the possession of the owners."

included in the appraisement. The States may also levy a license tax upon a domestic corporation, that is, upon its right not simply to be, but to do business within the State, and this license tax it may measure by the value of the capital stock. Also a State may levy a similar tax upon a foreign corporation, unless engaged in interstate commerce, the payment of which is made a condition precedent to its right to enter the State and to do business therein, and measure this tax by the nominal or market value of the capital stock of the company. In both of these cases the tax is not, in reality, upon the capital stock, but is measured by it.* The present section will be concerned with the taxation of corporate stock as intangible personal property in the hands of its holders

or owners.

46

The declaration of the court in the State Tax on Foreign-Held Bonds would, if strictly pursued, have prevented the levying of such a tax upon non-resident holders of the stock of domestic corporations, upon the principle of mobilia sequuntur personam. In Tappan v. Merchants' National Bank," however, the court held that, as to shares of stock at least, this principle does not reasonably apply, and that, for purposes of taxation, these shares may be separated from the person of their owner and given a situs where the corporation has its situs, namely, at the place of its incorporation. The court in that case say:

"The question is then presented whether the General Assembly, having complete jurisdiction over the person and the property, could separate a bank share from the person of the owner for the purposes of taxation. It has never been doubted that it was a proper exercise of legislative power and discretion to separate the interest of a partner in partnership property from his person for that purpose, and to cause him to be taxed on its account at the place where the business of the partnership was carried on. And this, too, without reference to the character of the business or the property. The partnership may have been formed for the purpose

46 But see 74, and especially W. U. Tel. Co. v. Kansas, 216 U. S. 1; 30 Sup. Ct. Rep. 190, and The Pullman Co. v. Kansas, 216 U. S. 56; 30 Sup. Ct. Rep. 232.

47 19 Wall. 490; 22 L. ed. 189.

of carrying on mercantile, banking, brokerage or stock business. The property may be tangible or intangible, goods on the shelf or debts due for goods sold. The interest of the partner in all the property is made taxable at the place where the business is located.

"A share of bank stock may be in itself intangible, but it represents that which is tangible. It represents money or property invested in the capital stock of the bank. That capital is employed in business by the bank, and the business is very likely carried on at a place other than the residence of some of the shareholders. The shareholder is protected in his person by the government at the place where he resides; but his property in this stock is protected at the place where the bank transacts the business. If he were a partner in a private bank doing business at the same place, he might be taxed there on account of his interest in the partnership. It is not easy to see why, upon the same principle, he may not be taxed there on account of his stock in an incorporated bank. His business is there as much in the one case as in the other. He requires for it the protection of the government there, and it seems reasonable that he should be compelled to contribute there to the expenses of maintaining that government. It certainly cannot be an abuse of legislative discretion to require him to do so. If it is not, the General Assembly can rightfully locate his shares there for the purposes of taxation." 48

48 In criticism of this argument, Professor J. H. Beale, Jr., in the Harvard Law Review (XVII, 254), says: "But it is submitted that the supposed distinction between bonds and stocks in this respect does not exist. It is true, as has been seen, that the owner is taxable upon the capital and proceeds of a business where that business is carried on, and that a partner in a firm is therefore taxable on the value of a firm business where the firm acts; and that in many ways the shareholder in a private corporation is like a partner. But the very difference in their legal position should lead to a difference in taxation. The partner is taxed on the business of the firm because he is the legal representative of the business; there is no one else to tax. The tax paid by the partners is the tax and the only tax on the firm. But the corporation, being a legal entity, is itself, as has been seen, taxed upon the business done; to tax the stockholders also upon it is to tax the very same thing twice. The legal interest of the partner in the business is that of the owner; the legal interest of the stockholder is not that of the owner but of the creditor; to him is due from the corporation