
    Philadelphia Contributionship for Insurance, etc., versus Commonwealth.
    1. The annual tax imposed by the Act of January 7th 1879, § 10 (P. L. 118), upon certain classes of corporations therein named, is not laid upon the money and receipts of such corporations, but upon their franchises, the amount of the net earnings or income being resorted tc simply as a just measure of the tax that should be paid for the enjoyment of those franchises.
    2. All corporations coming within the provisions of the above act are therefore bound to pay annually to the Commonwealth the fixed per centum rate upon all their income, even though part thereof may be derived from loans of the United States, or from loans of this Commonwealth, which by the acts authorizing their issue are expressly made payable free of State taxes.
    I 3. Such corporations are not entitled to deduct from the amount of income upon which taxation is payable by them, the difference between the amount expended several years before in the purchase of a security, and the par value at which such security has within the current year been redeemed. This cannot properly be regarded as a loss;'even it be so, the capital only is decreased thereby, aud this does not necessarily diminish the annual net earnings which have alone been adopted as the measure of the tax imposed.
    May 16th 1881. Before Sharswood, C. J., Mercur, Gordon, Paxson, Teunket, Sterrett, and Green, JJ.
    Error to the Court of Common Pleas of Dauphin county: Of May Term 1881, No. 155.
    Case stated, showing the following facts: The Auditor General and State Treasurer, in settlement of tax under the Act of January 7th 1879 (which is in this respect a re-enactment of the Act of May 1st 1868), charged the corporation with a tax of three per cent, on the amount of its net earnings or income received from all sources during the year ending October 31st 1879. The corporation appealed from the settlement on the following grounds: 1. Because it imposes a tax on income derived from loans of the United States : 2. Because it imposes a tax on income derived from loans of the State of Pennsylvania, which, by the terms of the acts which authorize their issue, were expressly made payable free of State taxes: 3. Because it disallows the claim of the company, in estimating its net income, to deduct from its gross receipts its loss on United States securities, purchased above par'and paid off by the government at par.
    The court held that the tax imposed by the above-mentioned acts is a tax not on the property but on the franchise of the corporation, to bo computed at the rate of three per cent, on its net income from all sources, including non-taxable bonds of the United States or of Pennsylvania. The court, therefore, overruled the first two grounds of appeal. As to the third objection, the court said, in an opinion by Henderson, J., “But there is a farther contention — the corporation defendant, iu estimating its net earnings, claimed to deduct from its gross receipts its loss on United States securities, purchased above par and paid off by the government at par. This claim was disallowed by the accounting officers. The argument in form of this proposition is not without some plausibility. It is crude aud difficult to answer. If a man gets less for a thing than he paid for it, he meets with a loss, and it impairs his capital. But it is the annual net earnings that are taxed. A diminution of capital does not necessarily diminish the annual net earnings. To adopt the rule here contended for would be to east an uncertain factor into the account. For this is purely a matter of speculation. The tax is assessed upon the net earnings, it rises and falls with them, not with the capital; with the net earnings, not with the earning capacity. If the corporation is inactive or its capital lies idle, it produces no basis of taxation.
    “ But it seems to mo that the fallacy of the argument is m the assumption that a depreciation in the value of the bonds is a loss to be deducted from the gross receipts. Clearly not, except as the depreciation affects the a/nnual net earnings. We should prefer to say that the premiums paid for the bonds should have been deducted when the investment was made, and might properly have been accounted for and taken from the gross receipts. But certainly the State cannot now settle a profit and loss account running through several years and many transactions. The law requires an annual settlement producing an annual tax, and upon an annual basis.”
    The Court entered judgment on the case stated in favor of the commonwealth, and subsequently overruled exceptions filed to the decision, whereupon the defendant took this writ- of error, assigning for error the decision of the Court overruling the defendant’s specifications of appeal from the settlement, and the entry of judgment for the commonwealth.
    
      W. W. Montgomery, for the plaintiff in error.
    It is admitted that a State cannot tax the property of corporations inv’ested in United States securities. But the Act of January 7th 1879, imposes a tax on income “ from all sources.” It is clear that as to so much of the “income” Avhich is derived from United States securities, the act is unconstitutional. A tax on the income is a tax on the debt, for as soon as the interest is due it becomes part of the debt. It has frequently been decided that in Avhatever form or in Avhatever terms, direct or indirect, a State law- attempts to reach United States bonds for taxation, the act is invalid : McCulloch v. State of Maryland, 4 Wheat. 316; Weston v. Charleston, 2 Peters 449 ; Bank of Commerce v. New York City, 2 Black 620; Bank Tax Case, 2 Wallace 200; Opinion of the Justices, 53 N. H. 640; Bank of Kentucky v. Commonwealth, 9 Bush 46 ; Monroe Savings Bank v. City of Rochester, 37 N. Y. 365. The case of State Tax on Railway Gross Receipts, 15 Wallace 284, is inconsistent in principle Avith the previous authorities, and should be restricted to the point actually decided.
    The court below adopted the refined distinction that the tax ivas on the corporate franchise, measured by net income, but the act does not say so, and if it did, it would be an attempt to do indirectly what cannot be done directly. Neither statutory implication nor judicial construction can evade the constitutional prohibition by calling United States securities “ a measure for taxing tlie franchise.” In fact they are no measure of the exorcise of the franchise. Our franchise is to insure houses from fire, but our income from the bonds remains constant, whether we insure much or little or not at all. The same argument applies to the Pennsylvania non-taxable bonds. To tax them thus indirectly is repudiation pro tanto: Newark City Bank v. The Assessor, 30 N. J. L. 16.
    We were entitled, in estimating net income, to deduct from gross receipts the loss suffered by receiving less for loans paid off than we paid for them. If we had received more than we paid, the profit would have been included in the taxable fund, and why shall not the loss be deducted ?
    
      Lyman D. Gilbert, deputy attorney-general (with him Henry TV. Palmer, attorney-general), for the commonwealth.
    There is a distinction between a tax on the franchise of a corporation and a tax on its property. In the former case the tax may be constitutional, even though a portion of the corporation’s capital is invested in United States securities, or other non-taxable property: Savings’ Society v. Coite, 6 Wallace 594; Provident Institution v. Massachusetts, Id. 611; Insurance Co. v. Loud, 99 Mass. 146. There is also a distinction as to the liability to taxation of property itself, according to its different stages of existence. Thus, in the State Freight Case, 15 Wallace 232, the Supreme Court held that a tax upon freight transported from State to State was invalid; biit at the same term, and in the next succeeding case, the same court held that a State tax upon the gross receipts of railroad companies is valid, though the gross receipts are largely made up from freight transported from State to State : State Tax on Gross Receipts, 15 Wallace, 284. The ground of the decision was that after the money lias come into the treasury of the company it has lest its distinctive character as freight by having been incorporated into the general mass of tlip company’s property. So, although certain imports in original packages are non-taxable, yet when the articles imported have been incorporated with the mass of property in the country, they lose their exemption: Brown v. Maryland, 12 Wheat. 439, 441; Waring v. Mayor, 8 Wallace 122; Pervear v. Commonwealth, 5 Wallace 479. So also the change from net earnings into dividends creates a new kind of property, subject to another kind of tax: Jones & Nimick Man’fg. Co. v. Commonwealth, 19 P. F. Smith 137.
    In this case the tax is not on the United States bonds, nor on the interest thereof, nor on the gross receipts arising in part therefrom, but is' measured by the “ annual net earnings ” — the residuum of gross receipts after expenses met — an entirely different kind of property, and a legitimate subject of taxation, without reference to the source whence it is derived. Such property springing from one source may thus be differently taxable in its several stages, as gross receipts, net earnings or dividends.
    The company suffered no “ loss ” by the payment at par of bonds which they purchased at a premium. The premium was the price of the extra security of the investment. Each year diminished the annual proportion of premium originally paid, and if any abatement should be made, it should only be the proportion chargeable during the tax year of 1879, and that would be merely speculative. But if it be a loss, it is a loss of capital, and cannot be deducted in computing a tax upon net earnings for any one year. A diminution of capital does not necessarily diminish the annual net earnings.
    June 13th 1881.
   Mr. Justice Sterrett

delivered the opinion of the court,

By the 10th section of the Revenue Act of 1879, — which is substantially a re-enáctment of the 6th section of the Act of May 1st 1868, — certain individuals, companies and corporations, therein mentioned, are required to make report to the Auditor General, setting forth the entire amount of net earnings or income received by them, from all sources, during the preceding year,, and pay a tax of three per centum thereon for the uso of the Commonwealth: P. L. 118.

The corporation, plaintiff in error, being clearly within the provisions of the act, made its return of earnings or income for the tax year ending October 31st 1879, and included therein $28,615.73, interest on United States bonds, and $15,375, interest on Pennsylvania bonds; both of which items, however, it claimed rvere exempt from taxation. It was also claimed that, in ascertaining its net earnings or income, the difference between the par value of $307,000 United States bonds whicli were called in and paid during the year, and the price at which they were purchased several years before, should be treated as a loss and deducted from its gross receipts. The accounting officers having refused to allow any abatement on account of either of these three items, the tax thereon, amounting to $2,068.19, was paid under protest and an appeal taken from the settlement. The decision of the court below was also adverse to the plaintiff in error on the points in controversy. The questions thus presented by the record are, whether, the income derived from either class of bonds, is exempt from taxation; and whether the difference between the price paid for the United States bonds and their par value, should be regarded as a loss and deducted from the gross receipts.

It may be conceded that the bonds, as such, are not taxable by the Commonwealth; but the tax in question is not laid on. the bonds. It is a tax on the corporate franchise of the plaintiff in error, measured by its net earnings. The right of the state to impose a tax on the franchise of any corporation that is indebted to it for existence and protection, is too clear for argument. If the right exists, as it undoubtedly does, the manner of its exercise must be left to the wisdom of the legislature : and, perhaps no standard or measure of taxation can be adopted that will operate more justly and equitably than a per centum on net earnings or income.

The interest received by the company on the bonds undoubtedly formed a part of its income, and while the bonds themselves are exempt from taxation by virtue of the laws under which each class respectively was issued, it does not follow that the same immunity adheres to the money paid from time to time in discharge of the interest due on the securities. When so paid it loses the non-taxablo characteristic of the bond on which it accrued, and should thenceforth be treated as any other species of income derived from other sources. But,'as already intimated, the tax is not laid on-the money and other receipts of the company. Its net earnings or income is resorted to simply as a just measure of the tax to be paid for the enjoyment of its corporate franchise.

There is an obvious difference between a direct tax on the property of a corporation and a franchise tax, measured by its earnings which, proximately at least, represent either the value ■ of the franchise granted or the extent of its exercise. The distinction has been repeatedly recognized by both Federal and State courts. In Society for Savings v. Ooite, 6 Wall. 594,-corporations, of the class to which the plaintiff in error in that case belonged, were required to pay annually a sum equal to three-fourths of one per cent, on the total amount of their deposits, and it was held that this was a valid franchise tax, and not a tax on property, and that the society had no right to claim exemption therefrom, to the extent of its deposits invested in non-taxable securities of the United States. Under a similar law in Massachusetts it was held that a savings institution having a portion of its deposits invested in Federal securities was liable to a tax on such deposits as fully as on account of other deposits, nothwithstanding the securities were declared by the act of Congress, under which they are issued, to be exempt from taxation under State authority : Provident Institution v. Massachusetts, 6 Wall. 611.

A distinction somewhat similar in principle is made in the cases of State Freight Tax, and State Tax on Railway Gross Receipts, 15 Wall. 232 and 284; in the latter of which it is held that a .statute imposing a tax on the gross receipts of railway companies is not repugnant to the Constitution of the Uni tec! States, though the receipts are made up in part of the freights received from inter-state transportation of merchandise.

The difference between the amount paid for the United States bonds and their par value cannot in any proper sense be regarded, as a loss, but if it were otherwise the plaintiff in error is not entitled to the deduction claimed. A decrease of capital does not necessarily diminish the annual net earnings. It is the latter that has been adopted as a just measure of the tax imposed on the franchise. The contention of the plaintiff in error on this point has been so fully answered by the learned judge of the Common Pleas, in the concluding portion of his opinion, that further comment is unnecessary.

Judgment affirmed.  