City of Allegheny v. Pittsburgh, Allegheny & Manchester Passenger Railroad

Opinion by Mr. Justice Mitchell, The Passenger Railway Company, appellee, was chartered by the special act of April 12, 1859, by the provisions of which it was to declare dividends “ of so much of the profits of said company as shall appear advisable to the directors thereof,” but in no case to exceed the amount of the net profits of the company. By the twelfth section of the act the company was required, inter alia, to pay to the city of Allegheny a certain per centage “ of the dividends declared.” The city of Allegheny by ordinance gave its consent to the occupation of its [421] streets upon the same condition of the payment of the tax upon “dividends declared.” The question in the present case is whether the transaction by which the railway company was leased to the traction company, and the stockholders exchanged their holdings of stock in the former for stock in the latter, assuming all these matters to have been parts of the same transaction, was equivalent to the declaration of a dividend by the railway company on which a tax would be due under the charter and ordinance. It is not necessary at present to discuss the argument of the appellee that only cash dividends are taxable under the charter. If that was the legislative intent the question would still arise whether any distribution of profits equivalent to cash could be made among the stockholders in any form, or by any name, so as to escape taxation. It is sufficient to say that there is no evidence here to warrant a jury in finding any device for such purpose. The tax is not on par value, or market, or actual value of stock, nor on profits earned, but on dividends declared. A dividend, as defined by Webster’s dictionary (1893) is “the share of a sum divided that falls to each individual, a distributive sum, share or percentage, applied to the profits as apportioned among stockholders.” It differs from profits in being taken by competent authority out of the joint property of the partnership or company, and transferred to the separate property of the individual partners or stockholders. No safely conducted business, corporate or other, distributes all its earned profits. There must be a fund reserved for contingencies, for repair or renewal of deteriorated material, etc., and the amount, absolute or proportionate, to be held for such purpose must be determined by the authority which conducts the business. The power to control this matter is necessarily implied in all authority to make dividends, and in the present case it is expressly vested in the directors who are to declare such dividends as “shall appear advisable” to them, not exceeding net profits. The words “ dividends declared ” therefore, have a substantial and settled meaning, and it is upon such dividends only, and not as already said on par or market value of stock or on profits earned, that the tax is laid. Continuing to regard all that was done by both corporations [422] and the stockholders as parts of a single transaction, as that is the aspect most favorable to the appellant, what was it in substance ? First, as to the stockholders individually, it was an exchange of their holdings in the railway stock, for holdings in the traction stock, at the rate of one to eight. The shares held by each stockholder were his individual and separate property. He could have sold the railway shares at 320, which was the market price, and bought traction shares at 40, also the market price, and would then have stood just where he stands now, with a change of his property from one form to the other in the ratio of one to eight, yet it would have been his own private act with which neither the company nor the other stockholders could have interfered, or for which they would have been responsible. The nature of the act was not changed by the fact that all the stockholders did it, whether separately or in pursuance of an agreement in which all joined. In either ease it was still the individual act of each in his own right. Secondly, as to the companies. The traction company acquired the stock of the railway company, which under its charter it had power to do. It might under such power have gone into the market and bought railway stock at 320, and sold enough of its own stock at 40 to pay for the other. Instead of the acquisition being made thus by separate purchase and sale of the two stocks, it was done by direct exchange between the owners. The nature of the transaction was not changed thereby. It was a transfer of property from one owner to another, and the personality of the purchaser or the seller did not change its substantial character. Then as to the railway company, its stock has changed holders, and that is all. The shares are all in existence just as they were before, but instead of being owned by numerous individuals they are held in one hand, in fact they are a valuable corporate asset of the traction company, and are pledged as collateral security for its bonds. As regards the railway company with reference to which the tax is to be considered, there was no distribution or change of what had been the joint corporate property, into the separate property of the individual stockholders. The whole transaction was a change [423] of ownership of the same property, and neither in form nor in substance the declaration of a dividend. The cases chiefly relied upon by the appellant, Matson’s Ford Bridge Co. v. Com., 117 Pa. 265, and Com. v. Telegraph Co., 15 W. N. C. 331, are not applicable. In both of them the tax was upon the value of the capital stock, and not on the dividends, which were mere measures of such value, and in. both of them there had been in fact a severance of earnings or profits from the mass of the corporate property, and a distribution of them among the stockholders as individuals, which is the essential character of a dividend. A distinction was raised in the argument here between the transaction as regards the exchange of stock by the holders in the railway company and the transfer to the traction company of the one thousand four hundred and ninety-nine shares of the Union Passenger company. The latter were held by trustees, but under what title or upon what terms does not precisely appear. The distinction was not made in the plaintiff’s statement, nor at the trial, and there is no assignment of error raising it specifically in this court; the plaintiff’s claim being made upon the entire transaction as single and involving a tax upon the whole. It appears inferentially in the argument and in some of the evidence that these shares of the Union company were part of the general assets of the appellee, and that in the arrangement they were transferred to the traction company in consideration of the issue of additional shares of its stock to the holders of the shares of appellee. If such was the fact it would seem to be a severance of these shares from the corporate property of the appellee and a distribution of their value or equivalent among the stockholders individually, and therefore a dividend, taxable unless the legislative intent was to restrict the tax to cash dividends only, an intent that could hardly be presumed, and the burden of proof of which would be upon appellee. But if this were the real state of the facts there would be no difference except the question of cash dividend between the distribution of the proceeds of this Union stock and the proceeds of the sale of the real estate, etc., as to which the learned judge below directed the jury to assess the tax. It would not be safe for us to assume that his including one and excluding the other was the result altogether of not having his attention called to the latter. [424] We must presume that the facts before him did not warrant him in putting both on the same footing. The facts if fully developed may however be so, and in affirming the judgment, therefore, we do so with leave to the court below to open and reconsider it upon this point should the facts and the law make it just and proper to do so. . Judgment affirmed.